Sense and Sensitivity: An Argument Against Reporting Multiple Net Present Values

Frikk Nesje, Moritz Drupp, Mark C. Freeman and Ben Groom

No 11547, CESifo Working Paper Series from CESifo

Abstract: We critically assess an almost universal Benefit-Cost Analysis (BCA) practice. In addition to the central Net Present Value (NPV), analysts frequently also report multiple additional values in what is commonly referred to as ‘NPV sensitivity analysis’. This practice is generally justified with reference to the future net benefits to the asset being risky, or because the correct discounting model is difficult to identify. We explain why, despite the fact that this is recommended as best practice across multiple prestigious and influential sources, the reporting of more than one NPV either lacks sufficient theoretical support or reflects decisions taken at an inappropriate level within the organizational hierarchy. As a consequence, this practice may confuse decision-makers more than help them. We illustrate this point in relation to a number of current guidelines across the public and private sectors and with particular focus on the US Environmental Protection Agency’s latest estimates of the Social Cost of Carbon.

Keywords: benefit-cost analysis; net present value; sensitivity analysis; social cost of carbon; regulatory analysis (search for similar items in EconPapers)
JEL-codes: G31 H43 L51 Q51 Q54 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp11547.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_11547

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().