I know you have a ton of midterms coming up, but we need to get some practice and understanding of discounting. Please complete and hand in the following in class Tuesday:
1. Using r=4%, find the PV of $100 received
a. 5 years from now.
b. 10 years from now.
c. 20 years from now.
d. 50 years from now.
e. 100 years from now.
2. Repeat 1, using r=1%
3. Graph PV of the $100 vs. time using your answers from (1) and then from (2). This should be done either using graph paper, or a graphing program such as that in Excel. You should show two curves: the first shows how PV declines with a discount rate of 4%, and the second how it declines with a discount rate of 1%.
4. The best explanation I can find on the discount rate(s) used in the influential Stern Review is in its set of FAQS . Go to these and:
a. In section 8 what specifically does it say about the rate(s) used to discount future costs of climate change to the present? Read very carefully and be very precise in you answer.
b. Using other sections of the FAQS, what temperature change does the Stern Review use in estimating damages, and how large are the damages it estimates from climate change?
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