Computing Net Present Value (NPV) in Cost-Benefit Analysis
Net Present Value (NPV) is a core tool in cost-benefit analysis, used to evaluate the economic viability of projects by comparing the present value of all benefits and costs associated with a project over time. NPV helps determine whether the benefits outweigh the costs and by how much, thus aiding in decision-making for policy or project implementation.
The formula for calculating NPV in a cost-benefit analysis context is:
NPV=\sum_{n\mathop{=}0}^T\underline{}\frac{B_t-C_t}{(1+r)^t}
Were,
Bt is the benefit at time t,
Ct is the cost at time t,
r is the discount rate reflecting time preference or opportunity cost,
t is the time period, usually in years
T is the total number of periods over which the analysis is conducted.
Due to lack of cost data, we have only computed the net present value of benefits in our computations, i.e. we set
Data sources for PPP and Inflation adjustment
In the benefit transfer framework applied, monetary values were adjusted for regional economic conditions and time consistency. For the PPP adjustment, we used Eurostat data on purchasing power parities (doi: 10.2908/prc_ppp_ind), based on the index set at EU272020=1. For inflation adjustment, values were brought to the price level of the year 2023 using the Harmonized Index of Consumer Prices (HICP) annual data (doi: 10.2908/prc_hicp_aind) for the European Union.