Laserfiche WebLink
<br />Therefore, the service life tends to be a critical factor in the analysis <br />when the discount rate (cost of capital) is relatively low and the service <br />lif~ or analy~i~ p~riod i~ r~lativ~ly ~hort,. <br /> <br />e <br /> <br />5.3 Discount Rate <br /> <br />The discount rate is a factor to which the final result (LTEC design) is <br />highly sensitive. Table 5.1 compares four alternate proposals with the <br />service life of 20 years and discount rates of 4, 7, 10 and 12 percent. It <br />should be noted in this evaluation, that the higher the discount rate, <br />the higher the annual charge for capital recovery and the more the evaluation <br />will tend toward alternatives with the least initial investment. <br /> <br />. <br /> <br />The Water Resources Council (WRC), an independent executive agency of the <br />United States Government, is required to annually publish the discount rate <br />to be utilized by Federal agencies in plan formulation and evaluation of <br />water and related land resources projects. This rate is used for the purpose <br />of discounting future benefits and computing costs, or otherwise converting <br />benefits and costs to a common time base. The WRC rate is based on the <br />average yield during the preceeding year on interest-bearing marketable <br />securities of the United States which, at the time the computation is made, <br />have terms of 15 years or more remaining to maturity. This average for <br />fiscal year 1980 is 8 1/4 percent. The WRC, however, can not raise nor lower <br />its discount rate by more than one-quarter of one percent for any year, and <br />since the rate for fiscal 1979 was 6 7/8 percent, the published WRC discount <br />rate for fiscal year 1980 is 7 1/8 percent. <br /> <br />The user may ~ish to utilize the WRC discount rate, a rate based on the e <br />current cost of borrowing money in a particular locality or some other value. <br />The user should keep in mind that the cost of borrowing money is governed <br />somewhat by perceived inflation in the economy. Since, the discount rate is <br />simply a means of converting costs to a common time frame, the selection of <br />the discount rate should be consistent with the method of estimating annual <br />maintenance and user costs. If present prices are used to estimate those <br />annual costs which will occur some time in the future, then the discount <br />rate, which is used to convert initial investments to annual costs, must be <br />relatively free of inflation. <br /> <br />e <br /> <br />16 <br />