There's a couple of errors in the discussion of DCF analysis I'm afraid!
The main one is that a 20% rate of return does not mean that if you invested £1 today you'd have £1.20 next year and £2.40 or £3.60 over three years. Instead, over say three years, if you put in £1 today, got £0.20 next year and the year after, and then £1.20 the year after that, that would be a 20% return.
(In effect, the rate of return is the rate you need to discount future cash flows to be indifferent. i.e. receiving £1.20 a year from now for £1 upfront today leads to indifference if you are discounting that future £1.20 by 20%, thus 20% is its rate of return).
A more minor quibble is the statement that a lot of people use 5% to discount - it really depends on how the research is being funded and its probability of success - most entities use a 'risk-adjusted' rate to take into account that you'd want a much higher estimated gain on a investment that might lose all your money than on one that is safe as houses; you also have to consider the cost of funding (the government might be able to borrow at 5% but a new tech startup might find it costs a lost more).
Source: I do a lot of financial modelling as part of my job. No, I don't get invited to parties much.
I think your explanation of the concept of Net Present Value (which you never explicitly name for some reason) would benefit if you were clearer about the difference between annual returns and total cumulative ones. It's fairly clear that the '20%' claim referred to an annual return whereas the 'x times' refers to a cumulative return. These latter claims seem to be NPV estimates from the description Tom gave.
There is also a difference worth highlighting between 'investing in science' and making an investment which is buying a tradable income generating asset (like say a savings account or stock market investment or perhaps a restaurant). The capital invested in the former is almost always depreciated to zero immediately (e.g. money spent on scientists' salaries or consumables) whereas you stand a good chance of getting a lot (or even all) your money back if you sell the latter. Even physical assets don't often have a resale value (if CERN wants to get out of particle physics research who can they sell the LHC to?). This makes science investment inherently much riskier than some others. Also some 'investments' are no such thing, just current spending. Much 'investing in the NHS' is of this type.
There's a couple of errors in the discussion of DCF analysis I'm afraid!
The main one is that a 20% rate of return does not mean that if you invested £1 today you'd have £1.20 next year and £2.40 or £3.60 over three years. Instead, over say three years, if you put in £1 today, got £0.20 next year and the year after, and then £1.20 the year after that, that would be a 20% return.
(In effect, the rate of return is the rate you need to discount future cash flows to be indifferent. i.e. receiving £1.20 a year from now for £1 upfront today leads to indifference if you are discounting that future £1.20 by 20%, thus 20% is its rate of return).
A more minor quibble is the statement that a lot of people use 5% to discount - it really depends on how the research is being funded and its probability of success - most entities use a 'risk-adjusted' rate to take into account that you'd want a much higher estimated gain on a investment that might lose all your money than on one that is safe as houses; you also have to consider the cost of funding (the government might be able to borrow at 5% but a new tech startup might find it costs a lost more).
Source: I do a lot of financial modelling as part of my job. No, I don't get invited to parties much.
I think your explanation of the concept of Net Present Value (which you never explicitly name for some reason) would benefit if you were clearer about the difference between annual returns and total cumulative ones. It's fairly clear that the '20%' claim referred to an annual return whereas the 'x times' refers to a cumulative return. These latter claims seem to be NPV estimates from the description Tom gave.
There is also a difference worth highlighting between 'investing in science' and making an investment which is buying a tradable income generating asset (like say a savings account or stock market investment or perhaps a restaurant). The capital invested in the former is almost always depreciated to zero immediately (e.g. money spent on scientists' salaries or consumables) whereas you stand a good chance of getting a lot (or even all) your money back if you sell the latter. Even physical assets don't often have a resale value (if CERN wants to get out of particle physics research who can they sell the LHC to?). This makes science investment inherently much riskier than some others. Also some 'investments' are no such thing, just current spending. Much 'investing in the NHS' is of this type.