ABSTRACT
Feasibility, transparency, consistent application across programs and auditability are all practical concerns in choosing a rule for selecting discount rates. Some government officials favor using government rates for discounting because it is simple and familiar. However, the simplicity is at least in part illusory. Often the biggest challenge in estimating the net present value of an investment is projecting its future cash flows. Whereas benchmarks do not exist for valuations based on risk-free rates, estimates that employ market-based discount rates allow the reasonableness of the assumed cash flows to be implicitly tested by comparison with market prices. Furthermore, using the same discount rates across different programs favors high-risk programs and therefore does not meet the goal of consistency across programs.
