The Sum of Discounted Consumption Flows Method: Equity with Efficiency?

Abstract

Kula's sum of discounted consumption flows method of investment appraisal may produce perplexing results in application; in some cases it does not produce the intended intergenerational equity. A modification to avoid these problems leads to inefficient allocation of consumption over time, without eliminating inequity. Examination of the basis of discounting suggests that, insofar as it is justifiable, it should be applied conventionally to reflect diminishing marginal utility of consumption as in the net present value criterion.