Why are the timing and time value of funds important in any capitol project analysis?

Answer 1

The timing and time value of funds are important parts of any capital project analysis. Political controversy exists about the choice of the specific discount rate and its application. Several analytical points can be examined that will shed light on this task. First, the discount rate should reflect the interest cost and impact to the public agency that borrows the initial funds. Second, the rate should become higher in later years to reflect increasing risk, inflation, uncertainty, and forecasting difficulties. This is a conservative practice of private project financial managers, and the logic of it can be applied soundly in a public setting. Third, the counting of benefits should cease in some future period, even though the project might last longer. This is another practice that is an implicit way of conservatively considering only those benefits within the intermediate term, unless a logical case can be made for an extended period of time. These points are made as to ensure that benefit over-counting is minimized.