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Discount rates for long-term projects: the cost of capital and social discount rate compared

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  • Seth Armitage

Abstract

Research on the cost of capital and on the social discount rate (SDR) has developed largely along separate paths. This paper offers an overview and comparison of both concepts. The consumption-based theory of discount rates is common to both, but there are striking differences in how the cost of capital and SDR are estimated. A project's cost of capital is inferred in practice from market data, by a well-established package of techniques, and project risk makes a large difference. In contrast, the SDR is estimated by applying judgement about the welfare of future generations, in the setting of consumption-based theory. Project risk has tended to be ignored under the SDR approach.

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  • Seth Armitage, 2017. "Discount rates for long-term projects: the cost of capital and social discount rate compared," The European Journal of Finance, Taylor & Francis Journals, vol. 23(1), pages 60-79, January.
    • Handle: RePEc:taf:eurjfi:v:23:y:2017:i:1:p:60-79
    DOI: 10.1080/1351847X.2015.1029591
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    Cited by:

    1. Serban Raicu & Mihaela Popa & Dorinela Costescu, 2022. "Uncertainties Influencing Transportation System Performances," Sustainability, MDPI, vol. 14(13), pages 1-15, June.
    2. Özlem Turan & Serkan Gurluk, 2024. "The Impacts of Social Discount Rate in Countries Striving for Industrialization," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 5428-5442, June.
    3. David Ceballos Hornero & Samuel Mongrut Montalván, 2021. "The Entrepreneurial Social Discount Rate: Risk Premium and Loss Aversion in New Ventures," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 16(4), pages 1-24, Octubre -.

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