This post contains a short video describing the discount rate in a cost benefit analysis. The discount rate is one of the most important concepts in cost benefit analysis. The discount rate incorporates the time value of money in the cost benefit analysis. It allows for the effects of opportunity cost, future costs, and risk from deferred returns from investment. The discount rate used in economics is a real discount rate as it does not include the effect of inflation on prices. Prices are held constant to a particular price year. There are a number of ways of deriving a discount rate, whether it is the long run bond rate or the use of the internal rate of return of the marginal project but in most cases the funding body determines this rate and this rate is then applied across all projects.
I will be releasing more short cost benefit analysis concept videos soon.
The video can be watched at the link below:
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