Discounted Expenditures

Discounted Expenditures


an economic category that reflects as costs the amount of full current and one-time expenditures of social labor required to produce goods and services. Numerically, discounted expenditures are equal to the sum of full current production expenditures (including amortization) S and the part of capital investment C that is associated with the particular activity. This part is equal to C/Tn, where Tn is the normative payoff period. C/Tn can be written as C (1/Tn), where 1/Tn is the normative coefficient of efficiency, or En. Thus, expenditures X = S + En · C.

Discounted expenditures are computed when comparing variants of capital investment needed to accomplish a particular economic task. The best variant is determined on the basis of minimum discounted expenditures. Economically, in most cases, the best variant is not the one requiring minimum current expenditures, because this variant usually requires greater capital investment. For example, minimum current expenditures are obtained where machines replace manual labor, but this requires capital investment for mechanization. The amount of capital investment is very important in choosing variants, because the accumulation fund of the national economy is limited. Therefore, it is necessary to select the variant that gives an optimal ratio between current expenditures and capital investment under given conditions. To achieve this ratio, capital investment is expressed as an annual amount that is proportional to each year’s share of the normative payoff period 1/Tn or the coefficient of efficiency En. The calculated investment is then added to current expenditures. Thus, let us assume that it is necessary to select the most efficient machine tool from three possible types, whose prices, including installation costs, are 50,000, 60,000, and 70,000 rubles, respectively, and that the corresponding current annual expenditures for production of output are 40,000, 35,000, and 30,000 rubles. If we take the coefficient of efficiency as 0.12, as determined according to the Standard Methods for the Determination of the Economic Efficiency of Capital Investment, the discounted expenditures will be 50,000 · 0.12 + 40,000 = 46,000 rubles; 60,000 · 0.12 + 35,000 = 42,200 rubles; and 70,000 · 0.12 + 30,000 = 38,400 rubles. Thus discounted expenditures are smallest for the third variant, which is the one that should be selected.

The value of the normative coefficient of efficiency depends on the accumulation fund and the need for capital investment. The larger the fund, the lower the norm, making it possible to invest capital in more expensive and sophisticated machinery. The greater the need for capital investment, the higher the norm, in which case financial resources will have to go to variants that require a smaller capital investment.

The inclusion in discounted expenditure of the part of capital investment corresponding to the norm of return on capital investment is not intended to ensure repayment of the capital investment; this repayment is achieved through amortization, which is part of current expenditures. In computing discounted expenditures, it is economically meaningful to add part of capital investment to current expenditures, because this makes it possible to reflect the smallest increase in net output that can be obtained in the national economy through the given capital investment, which is directed toward increasing the social product. This computation determines both the value of the coefficient of efficiency when comparing variants of En and the value of this coefficient when comparing expenditures incurred at different times B. According to the Standard Methods, the latter is taken to be equal to 0.08. Under socialism, discounted expenditure is not the price of production, because the expression En = 1/Tn is not average profit; rather, it represents the minimum amount that is the inverse of the normative payoff period.

Discounted expenditures are used by planners to select variants of capital investment, new technology, and the location of production. The All-Union Conference on Determination of the Economic Efficiency of Capital Investment and New Technology (1958) recommended the use of discounted expenditures for these purposes. These recommendations have become part of the Standard Methods for the Determination of the Economic Efficiency of Capital Investment. Sectorial and specialized methods have been based on these recommendations, as have the methods adopted by the Council for Mutual Economic Assistance for calculating efficiency in the implementation of international measures within the world socialist system.


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