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<br />.r--;~'..I"'" <br /> <br />;- <br /> <br /> <br />o Tf{@~g~?fgJ <br /> <br />JUt 15198~ m <br />COLof?4DO U) <br />CONSER'V' . WATER <br />AT/ON BOARD <br /> <br />DRAFT DISCOUNT RATE DISCUSSION <br /> <br />Those interested in the Cache La poudre appraisal level <br /> <br />study now in progress have expressed concern that the 7 1/2% <br /> <br />discount rate adopted by the Board tor evaluation purposes is too <br /> <br />low. The purpose of this memorandum is to address that concern, <br /> <br />and to explain the basis for the Board's choice of the 7 1/2% <br />discount rate (together with sensitivity analyses at 5% and 10%). <br /> <br />For the past two years, interest rates have been much higher <br /> <br />than at any time in recent u.S. history. The prime rate has been <br /> <br />between 15% and 20% for much of this time. It would seem <br /> <br />obvious, then, that the discount rate used to evaluate potentia! <br /> <br />public investments, including water resource development <br /> <br />projects, should be higher than the current 7 5/8% used by <br /> <br />federal agencies. The reason that this federal rate is as low as <br /> <br />7 5/8% is that its rate of increase over time is constrained to <br /> <br />1/4% per year by explicit policy. Such a policy does not apply <br />to the State of Colorado; so why, one might ask, should Colorado <br /> <br />\ <br /> <br />t <br /> <br />adopt a discount rate as low as the federal rate? There are <br /> <br />three answers to this question. <br /> <br />First, and least important, a 7 1/2% discount rate permits <br />direct comparison of the results of the Colorado Water Conserva- <br /> <br />tion Board evaluation studies with those of federal agencies. It <br />would be very difficult for the reader to determine whether <br /> <br />different results were a consequence of differing projections of <br />project impacts or simply ditferent discount rates if our studies <br /> <br />1 <br />