Question

3. In Chapter 6, we talk about benefit-cost analysis (BCA). Why might the choice of discount rate tend to matter more for the benefit side of a BCA than the cost side?

Answer 1

The major part of the cost incurs at the beginning of the project. Therefore, discount rate does not have a significant impact on the cost side. On the other hand benefits occur at later part of the project thus a higher discount rate will reduce the present value of benefit significantly.

This is the reason that discount rate has significant impact on benefit side than the cost side.

The benefits will be occurring in future while the cost has incurred in present value terms. Therefore, a higher discount rate results in lower present value of benefit.