In order to calculate the stream of benefits that would enable the Net Present Value (NPVBenefit - NPVcost) to be > 0 for the risk management scenario, the following assumptions are made:
- The time horizon over which benefits occur is set at 20 years;
- Benefits start in Year 2 (benefits are zero in year 1); and
- The benefits are the same each year from Year 2 to 20.
Using these assumptions, the annual benefit for years 2-20 can be calculated using the following formula (where r is the discount rate):
| AnnualBenefit = | NPVcost |
| [(1+r)2 + (1+r)3 + (1+r)4 + ... + (1+r)20 ] |
Where:
- AnnualBenefit is the benefit calculated for years 2-20 that satisfies the economic valuation test
- NPVcost is the Net-Present-Value of the risk management scheme's costs
- r is the discount rate
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