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The Economic Opportunity Cost of Capital in South Africa

Author

Listed:
  • Chun-Yan Kuo

    (Senior Fellow, John Deutsch International, Department of Economics, Queen’s University, Canada,)

  • Glenn P. Jenkins

    (Department of Economics, Queen's University, Kingston, Canada and Eastern Mediterranean University,North Cyprus)

  • M Benjamin Mphahlele

    (Limpopo Economic Development Agency, Limpopo Province, South Africa.)

Abstract

AN INVESTMENT PROJECT USUALLY LASTS FOR MANY YEARS. To determine if the project should be implemented, the net present value of the project is considered the most satisfactory criterion for use in its economic appraisal. This criterion requires the use of a discount rate in order to be able to compare the benefits and costs that arise in different time periods over the life of the investment. The economic opportunity cost of capital (EOCK) is the appropriate discount rate to use when estimating the economic net present value of a project. This hurdle rate applies not only to investments financed solely with public funds but also to investments in the form of joint public-private ventures and the provision of fiscal incentives to private investment. If the economic net present value of the project is greater than zero, the project is potentially worth implementing. This implies that the project would generate more net economic benefits than if the resources had been used elsewhere in the economy. On the other hand, if the net present value is less than zero, the project should be rejected on the ground that the resources invested could be put to better use if they were left to be allocated by the capital market. This paper describes an analytical framework that will enable us to estimate the economic cost of capital in South Africa.

Suggested Citation

  • Chun-Yan Kuo & Glenn P. Jenkins & M Benjamin Mphahlele, 2003. "The Economic Opportunity Cost of Capital in South Africa," Development Discussion Papers 2003-05, JDI Executive Programs.
    • Handle: RePEc:qed:dpaper:5515
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    References listed on IDEAS

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    1. repec:bla:econom:v:38:y:1971:i:152:p:395-412 is not listed on IDEAS
    2. Sjaastad, Larry A & Wisecarver, Daniel L, 1977. "The Social Cost of Public Finance," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 513-547, June.
    3. SANDMO, Agnar & DREZE, Jacques H., 1971. "Discount rates for public investment in closed and open economies," LIDAM Reprints CORE 98, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. David F. Burgess, 1981. "The Social Discount Rate for Canada: Theory and Evidence," Canadian Public Policy, University of Toronto Press, vol. 7(3), pages 383-394, Summer.
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    Cited by:

    1. Monika Foltyn-Zarychta & Rafał Buła & Krystian Pera, 2021. "Discounting for Energy Transition Policies—Estimation of the Social Discount Rate for Poland," Energies, MDPI, vol. 14(3), pages 1-21, January.
    2. Chun-Yan Kuo & Glenn Jenkins, 2007. "The Economic Opportunity Cost Of Capital For Canada - An Empirical Update," Working Paper 1133, Economics Department, Queen's University.
    3. Glenn Jenkins & Chun-Yan Kuo & Arnold C. Harberger, 2011. "Cost-Benefit Analysis for Investment Decisions: Chapter 8 (The Economic Opportunity Cost of Capital)," Development Discussion Papers 2011-08, JDI Executive Programs.
    4. Arnold C Harberger & Glenn P Jenkins & Chun‐Yan Kuo & M Benjamin Mphahlele, 2003. "The Economic Cost of Foreign Exchange for South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 71(2), pages 155-169, June.
    5. Saule Baurzhan & Glenn P. Jenkins, 2017. "On-Grid Solar PV versus Diesel Electricity Generation in Sub-Saharan Africa: Economics and GHG Emissions," Sustainability, MDPI, vol. 9(3), pages 1-15, March.
    6. Rafał Buła & Monika Foltyn-Zarychta, 2022. "Declining Discount Rates for Energy Policy Investments in CEE EU Member Countries," Energies, MDPI, vol. 16(1), pages 1-27, December.
    7. Glenn Jenkins & Andrey Klevchuk, "undated". "Appraisal Of El-Kureimat Combined Cycle Power Plant," Development Discussion Papers 2006-03, JDI Executive Programs.
    8. Chun-Yan Kuo & Sener Salci & Glenn P. Jenkins, 2015. "Measuring the Foreign Exchange Premium and the Premium for Non-Tradable Outlays for 20 Countries in Africa," South African Journal of Economics, Economic Society of South Africa, vol. 83(2), pages 269-285, June.
    9. Abdallah Othman & Glenn P. Jenkins & Mikhail Miklyaev, 2022. "Estimation of Economic Opportunity Cost of Capital: An Operational Guide for Mozambique," Development Discussion Papers 2022-04, JDI Executive Programs.

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