The Discount Rate in Life Cycle Cost Analysis of Transportation Projects

Although there is a widespread agreement on the need to discount future costs in monetary-based evaluation techniques of long-term transportation projects, there is less agreement on the specific discount rate that should be employed in the analysis. The choice of the discount rate is ultimately a policy decision; but even when the philosophical approach is set by the policy makers and a general guidance is issued, there still remain many questions to be addressed—questions such as: What are the tangible rates that decode the preferred rationale set by the policy makers? What are the data sources to obtain these rates? How can we deal with the economic aspect of uncertainty in the actual analysis? The research presented in this paper does not aim at adding another philosophical approach for the discount rate into the on-going debate; rather it aims at providing a practical insight for the practitioner analyst as regards the effect of implementing on-hand approaches and guidance on the discount rate. The research infers several probable scenarios for choosing and applying the discount rate from past academic research, federal guidance, or state-ofthe-practice at transportation agencies. By developing a study methodology based on a look-back life cycle cost analysis that employs timely data, these scenarios are tested and analyzed in depth. The results of these analyses endorsed some guidance’s while, on the other hand, uncovered the shortcomings of other proposed approaches. At the end, the paper concludes with recommending good-practice guidance for choosing the discount rate. TRB 2006 Annual Meeting CD-ROM Paper revised from original submittal.