An Analysis of Discounting Procedures and Risk Analysis Techniques for Use in the Department of Defense.
AIR FORCE INST OF TECH WRIGHT-PATTERSON AFB OH SCHOOL OF ENGINEERING
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In this study the writer examines the debate over the choice of an appropriate discount rate for evaluating public investments. The conclusions drawn from the study are then applied to investment decisions within the Department of Defense. Two major issues are examined in detail. In the first, the social time preference discount rate is rejected, for both practical and theoretical reasons, in favor of an opportunity cost of capital rate which considers the alternative use in the private sector of the funds used in public investment projects. The second point of controversy centers on the use of a riskless discount rate versus a rate that includes the risk compensation for private investments. The riskless discount rate is rejected because it does not adequately portray the opportunity cost of public investment funds.
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