Measurement of benefits and costs: minimum return requirement
This chapter provides a summary of alternative approaches to the problems, dealing with the conceptual basis of the minimum rate of return (MRR), methods for reconciling use of the different rates suggested, and approaches to the problem of measurement. Measurement of social time preference rate is based on either after-tax returns to private saving or the marginal utility of consumption. Determination of the MRR on public sector proposals should, therefore, be based on the value of the private sector opportunity forgone. A given sum of money has different value depending on when it is received or paid; and in order to aggregate the stream of benefits generated or the stream of costs incurred over the life of a project, annual flows must be expressed in equivalent values. The rate that is sought is based on the social opportunity cost and social time preference rates for funds invested in projects.