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Benefit-Cost Analysis |
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Benefit-Cost Analysis |
TOPIC: Net Present Value Calculation
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Calculate Present Value - Both NPV and B/C tests require that costs and benefits be presented in terms of their value as of the time of the decision-making. This involves a two-step process. First, all costs and benefits must be expressed in constant dollars (which effectively controls for future inflation). Then, a discount factor is use to reduce the values of future costs and benefits to represent their present values. The formula is as follows: Present value of a dollar of cost or benefit in a future year (n) = 1 / (1 + d)n where d = discount rate Selection of the appropriate discount rate is an important and controversial policy issue. Source: Transportation Research Circular 477, Transportation Research Board, 1997 |
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ADDITIONAL INFORMATION
The lower the discount rate selected, the more likely will be that projects with high initial costs but benefits far off in the future will pass the NPV and benefit/cost tests. See Section F2c for more details.
Source: Transportation Research Circular 477, Transportation Research Board, 1997