Long time horizons, low discount rates and moderate investment criteria

Abstract

Low discount rates are not downward adjustments of rates of return; they do not favour low-returning projects; high discount rates do undervalue long-term environmental costs and future generations. Reinvestment of revenues is neither total (the only justification for rate-of- return discounting) nor confined to the project under appraisal (the only justification for limited-time-period opportunity costs of capital). Weighted average discount rates distort relative values. Capital rationing using the opportunity cost of partially reinvestible investment funds gives a result for long-term projects intermediate between low and high discount rates. With a high saving rate, use of investment growth rate as a discount rate may be appropriate, but there is a logical case for applying differential discount rates according to circumstance. © 1996 Taylor & Francis Group, LLC.