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<br />_.~ <br /> <br />..,\ <br /> <br />,..- <br /> <br />were performed using a discount rate substantially different from <br /> <br />that used by the federal water agencies. <br /> <br />Second, project evaluation studies are normally, and we <br /> <br />believe properly, prepared in inflation-free, or constant-doilar <br /> <br />terms. Economic evaluations are least complicated, most <br /> <br />understandable, and easiest to carry out if they are net of <br />general inflationary considerations. Financial feasibility <br /> <br />. <br />stUdies, on the other hand, should be conducted in current doilar <br /> <br />terms.* <br /> <br />Presently high market interest rates inevitably include a <br />built-in expectation of future price increases, based upon the <br /> <br />double-digit inflation which has characterized recent years. <br />This inflationary expectation must be removed from any observed <br />or market interest rates before they can be used as indicators of <br /> <br />the appropriate discount rate to use for constant-dollar economic <br /> <br />evaluations. For example, if the market rate of interest were <br /> <br />18% and the expected rate of intlation were 12%, then the real <br /> <br />rate at interest would be about 6%. <br /> <br />Third, economists have disagreed for at least f~fty years <br /> <br />* The distinction between an economic analysis and a financial <br />analysis is easy to miss, but fundamental, for their <br />purposes and methods are quite different. An economic , <br />analysis is concerned with all of the prospective monetary <br />and non-monetary benefits and costs, direct and indirect, <br />andllto whomsoever they may accrue," of a proposed project. <br />A financial analysis is concerned only with the monetary <br />revenues and costs to the entity responsible for the <br />project. <br /> <br />2 <br />