Cost Benefit Analysis including Public Sector Discount Rates
Page updated 29 Oct 2010
Cost benefit analysis is a decision making tool that aims to assess the value of a proposal or competing proposals on a consistent basis.
This is done by quantifying all costs and benefits in monetary terms, and discounting them to a common point in time to determine the net benefits of each proposal. There are techniques for ensuring that social costs and benefits are included or taken account of (even those that are difficult to measure in monetary terms) and for ensuring that there is no double counting of costs or benefits.
The Cost Benefit Analysis Primer is intended to provide simple, non-technical assistance for public sector policy and financial analysts. For more complex issues or more detailed guidance the reader is referred to other more detailed sources (see the Cost Benefit Analysis Primer bibliography) or the relevant Treasury Vote team. More fully developed guidance is also provided by some sector organisations. For example, the New Zealand Transport Agency has developed an extensive Project Evaluation Manual for use by road controlling authorities.
Public Sector Discount Rate
The Treasury has recently reviewed its real discount rate to be used in cost benefit analysis. Note that real discount rates have the impact of inflation removed and therefore should only be applied to real cost and benefit flows. The new real rates are as follows:
| Category | Rate |
|---|---|
| Default rate (for projects that are difficult to categorise including regulatory proposals): | 8.0% p.a. |
| General purpose office and accommodation buildings | 6.5% p.a. |
Infrastructure and special purpose (single-use) buildings:
|
8.0% p.a. |
| Telecommunications, media and technology , IT and equipment, Knowledge economy (R&D) | 9.5% p.a. |
An explanation of how these rates were arrived at is set out in the technical note Public Sector Discount Rates for Cost Benefit Analysis.
The Cost Benefit Analysis Primer is currently being revised.
