When benefit-cost analysis is used to facilitate U.S. public policy decisions,
A) the discount rate is selected by the individual policy maker
B) no adjustment can be made for inflation, since the inflation rate is not known in advance
C) the discount rate used should reflect the social opportunity cost of funds
D) only incremental costs are adjusted for time differences

Question

Quizplus · Accepted Answer

The discount rate used in benefit-cost analysis should reflect the social opportunity cost of funds, which represents the return that could be earned by investing those funds in their next best alternative project. This approach takes into account the time value of money and reflects the fact that resources used for a given project have alternative uses that could provide a positive return. Therefore, the cost of investing resources in a given project should be at least equal to the potential returns that could be earned by using those resources in their next best alternative project.

When Benefit-Cost Analysis Is Used to Facilitate U