---
title: 11 Hidden Dangers of Negative Interest Rates [Template]
description: Get the NPV Template to evaluate project financials and to understand the impact of negative interest rates on financial analysis
---

[SAP BW|BOBJ|Project Management Blog ](https://www.sapbwconsulting.com/blog)

# [11 Hidden Dangers of Negative Interest Rates [Template]](https://www.sapbwconsulting.com/blog/sap-bw-consulting/hidden-dangers-of-negative-interest-rates)

 Written by [Lonnie D. Ayers, PMP](https://www.sapbwconsulting.com/blog/author/lonnie-d-ayers-pmp) | Tue, Aug, 02, 2016 @ 06:34 PM

## Have you ever had to prepare a project investment proposal?

If so, then you know that one of the most common ways to [evaluate](https://www.sapbwconsulting.com/resources/sap-bi-technical-definition) two alternative [investments](https://www.sapbwconsulting.com/blog/what-is-the-tco-of-that-shinny-new-system-youre-about-to-buy) is to compare the [**NPV**](https://www.sapbwconsulting.com/how-to-increase-profitability-sap-profitability-management-guide) or **Net Present Value** of two or more [investment](https://www.sapbwconsulting.com/blog/inbound-marketing/are-you-ready-to-think-grow-rich-mindmap) alternatives.

 

 

## Today’s world is upside down

 

Recently, while helping a client develop a NPV based evaluation of two projects, I was asked what about the impact of negative [interest rates](https://www.sapbwconsulting.com/blog/inbound-marketing/does-pci-dss-compliance-affect-you) on my recommendations. Hadn’t really thought of that, so I first prepared my NPV spreadsheet and used a spread of [interest rates](https://www.sapbwconsulting.com/how-to-increase-profitability-sap-profitability-management-guide) from 1% to 20%. Nothing out of the ordinary [there, as](https://www.sapbwconsulting.com/blog/inbound-marketing/the-guaranteed-easiest-way-to-calculate-sla) you can see from the chart below, where I used 1%.

 

** Typical NPV Pattern**

 

As expected, in this scenario, the NPV was greater for the [financial returns](https://www.sapbwconsulting.com/blog/roce-return-on-capital-employed-simply-explained) generated in the early years versus the later years.

 

But then I swapped the 1% interest rate for -1% interest rate.

 In this scenario, at -1% interest, the payoff is completely reversed.

 

## How will investment behavior be impacted by this scenario?

 

As you can see, this turns the traditional [investment analysis](https://www.sapbwconsulting.com/blog/inbound-marketing/how-to-correctly-calculate-conversion-rate-3-easy-formulas-to-use) results upside down. I am still running various scenarios through my **NPV calculator** but the result seems consistent at all interest rates and time variation combinations.

## Negative Interest Rates Impact On Project Investments

 

What can you conclude regarding the impact this is having on companies that are deciding on project investments, at least if they use NPV as part of [their decision criteria](https://www.sapbwconsulting.com/blog/inbound-marketing/10-ways-profound-knowledge-can-improve-building-landing-pages)?

 

- Virtually all [projects](https://www.sapbwconsulting.com/blog/inbound-marketing/4-ways-to-bring-digital-innovation-to-your-company) will pay off much later in their lifecycle in a **Negative Interest Rate** environment
- The greater the **negative interest rate**, the greater the **payoff is later** in the project lifecycle (when the expected annual benefits are fairly steady)
- If you need quick payoffs, any [project](https://www.sapbwconsulting.com/blog/how-to-build-a-sap-sem-bps-retail-industry-value-case) whose payoff is further in the future **will not make the cut** in all likelihood.
- There will be extreme pressure to capture the benefits in the first year (or earlier) of a project. If you play with the **NPV template** we provide, by adjusting payoffs up or down, you get some very **dramatic swings** in the NPV values when you use negative interest rates.
- Projects that are sold on **‘long term savings or accrued benefits’** will be very difficult to sell.
- From a [**project risk analysis**](https://www.sapbwconsulting.com/need-help-with-your-rfp) perspective, those projects whose payoff is far in the future, and in this case, the future is not all that far out, will be at an extreme disadvantage.
- This [risk averseness](https://www.sapbwconsulting.com/sap-sem-cpm-risk-register-design-template) will cause short-termism to become extreme. Within the world of **IT Investments**, large multi-year implementations put **everybody at risk.**   Instead, multiple short term, quick (but not necessarily high) payback projects become the norm.
- If you’re in sales (and if you're in business, you're in sales), you’re going to have to be able to work with your prospects on a **much deeper level** in order to **get real [customer data](https://www.sapbwconsulting.com/develop-a-data-governance-framework)** in order to produce **valid [business cases](https://www.sapbwconsulting.com/blog/how-to-use-a-project-charter-to-start-a-project)**. This can be a real challenge, especially early in the sales cycle, when you may not yet have either the **trust of your customer** nor very good data about their operations. It also means greater expense when developing [business cases](https://www.sapbwconsulting.com/blog/understanding-the-difference-between-value-model-and-value-case), whether it is for complex ERP systems or Inbound Marketing Software.
- At a more general level, most internal systems within a company will not be configured to handle **negative interest rates**. Within any company, almost no one will think this affects them. They would be wrong. Directly or indirectly, it will affect their ability to progress.
- This **will slow innovation**, as it will now take much longer to get investment dollars approved. This will be especially true for riskier investments with questionable payback.
- Smaller companies will find it much more **difficult to obtain financing.**

 

This last point is a critical issue and can be seen throughout the economies of the world, where more than 7 trillion dollars of government debt is already in negative territory.

 

## Economic Vapor Lock

In those economies where the government has decided to push interest rates into negative territory in order to stimulate the domestic economy, we can see that the opposite will be the result. When companies operating in those same negative interest rate economies run their NPV calculations, companies will see that it is not a good time to invest. The result of negative interest rates and upside down NPV analysis will results in an Economic Vapor Lock where nothing happens and nothing moves, the exact opposite of what the central bank was hoping for.

 

## The Deflation Dragon

 

This is the stated reason a growing number of central banks have gone negative. But it has led to:

 

- [Low growth](https://www.sapbwconsulting.com/solving-your-growth-and-revenue-problem),
- Anemic business investment,
- Risk averseness.

 

For most of us, this seems like a distant, esoteric subject. But it has consequences beyond low mortgage rates and asset bubbles. It means businesses have a hard time borrowing money, and an even tougher time finding projects that make sense to invest in. That makes it tougher for every [business that sells to other businesses](https://www.sapbwconsulting.com/knowing-what-you-sell-the-key-to-dominating-your-market).

 

 

## Present Value Calculator

If you just want to do a quick Present Value calculation, I've built this simple calculator for just that purpose.  It won't handle negative interest rates, yet.  So you still need to grab the downloadable version, which will.

 

People Who Read This Also Read

- Learn [What Tools](https://www.sapbwconsulting.com/blog/learn-what-tools-to-use-to-investigate-is-mill-functionality) To Use To Investigate IS-Mill Functionality
- BusinessObjects [Explorer](https://www.sapbwconsulting.com/blog/businessobjects-explorer-best-practices) Best Practices

** **

 

[View full post](https://www.sapbwconsulting.com/blog/sap-bw-consulting/hidden-dangers-of-negative-interest-rates)

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