David Hume discusses James I’s cession of the Dutch cautionary towns:
After the truce was concluded between Spain and the United Provinces, the States made an agreement with the king, that the debt, which then amounted to 800,000 pounds, should be discharged by yearly payments of 40,000 pounds; and as five years had elapsed, the debt was now reduced to 600,000 pounds, and in fifteen years more, if the truce were renewed, it would be finally extinguished. But of this sum, 26,000 pounds a-year were expended on the pay of the garrisons: The remainder alone accrued to the king: And the States, weighing these circumstances, thought, that they made James a very advantageous offer, when they expressed their willingness, on the surrender of the cautionary towns, to pay him immediately 250,000 pounds, and to incorporate the English garrisons in their army … the annual sum of 14,000 pounds, the whole saving on the Dutch payments, amounted, in fifteen years, to no more than 210,000 pounds; whereas 250,000 pounds were offered immediately, a larger sum, and if money be computed at ten per cent, the current interest, more than double the sum to which England was entitled. [An annuity of 14,000 pounds during fifteen years, money being at 10 per cent, is worth on computation only 106,500 pounds; whereas the king received 250,000.]
I wonder: Is this the first (1762) recorded net-present-value calculation in a policy context?
Update Hume also argues that the situation was non-zero-sum and that the transaction was a Pareto improvement:
Yet the bargain was good for the Dutch, as well as the king; because they were both of them freed from the maintenance of useless garrisons.
Second update A reader points me toward http://papers.ssrn.com/sol3/papers.cfm?abstract_id=515246″>this paper by William N. Goetzmann of Yale, giving Fibonacci’s Liber Abaci (1202) credit for net present value. I didn’t know the idea went back so far, but Hume assumes that the relevant financial calculations are well understood.
My question was different: Was Hume the first to apply this financial technique in a policy context?