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Barry McVay's FEDERAL CONTRACTS DISPATCH

DATE: February 17, 2000

FROM: Barry McVay, CPCM

SUBJECT: Discount Rates for Cost-Effectiveness Analysis of Federal Programs

SOURCE: Federal Register, February 17, 2000, Vol. 65, No. 33, page 8212

AGENCIES: Office of Management and Budget (OMB)

ACTION: Revisions to Appendix C of OMB Circular No. A-94, Benefit-Cost Analysis of Federal Programs

SUMMARY: This revision to Appendix C of OMB Circular A-94 updates the interest rate and inflation assumptions used to prepare the budget of the U.S. government.

EFFECTIVE DATE: February 17, 2000, through January 31, 2001.

FOR FURTHER INFORMATION CONTACT: Robert B. Anderson, Office of Economic Policy, Office of Management and Budget, 202-395-3381.

SUPPLEMENTARY INFORMATION: OMB Circular A-94 provides federal agencies with guidance on benefit-cost, cost-effectiveness, and lease-purchase analysis in evaluating federal activities. Appendix C, which is updated annually around the time of the president's budget submission to Congress, provides both "nominal" interest rates and "real" interest rates.

Nominal interest rates represent the future purchasing power of the dollar in that they reflect expected inflation. Nominal interest rates are commonly used in lease-purchase analyses to determine the most advantageous alternative.

Real interest rates represent constant-dollar values by measuring benefits and costs in units of stable purchasing power, as when determining the cost-effectiveness of a program. A real interest rate can be approximated by subtracting expected inflation from a nominal interest rate.

The following are the rates to be used through January 2001 when making such calculations:

Analyses of programs with terms different from these may use a linear interpolation. For example, a four-year project can be evaluated with a rate that is the average of the three-year rate and the five-year rate. Programs longer than 30 years may use the 30-year interest rate.

For comparison purposes, the following are the rates that were used last year:

FOR FURTHER INFORMATION CONTACT: Barry McVay at 703-451-5953 or by e-mail to BarryMcVay@FedGovContracts.com.

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