Choosing the Discount Rate for Defense Decisionmaking

Abstract : Results are presented of research on the choice of the discount rate for the evaluation of public projects. The need for discounting arises in the evaluation of both public and private projects because costs and benefits occurring in different years must be treated differently. While all serious economists believe that discounting is the correct way to reduce a stream of costs or benefits to a single number so that one stream can be compared with another, there is much disagreement over the appropriate rate to apply in actual decisions. In evaluating public investments, particularly military projects, states of the world in which tastes, production possibilities, or benefits differ from those of the current state or most likely future state, are too often ignored. It should be possible to improve our assessments of military projects if the effect of possible countermeasures are directly incorporated into the present value calculations.

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