UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON. D.C. 20460
OFFICE OF
SOLID WASTE AND EMERGENCY
RESPONSE
OSWER Directive No. 9355.3-20
MEMORANDUM
SUBJECT: Revisions to OMB Circular A-94 on Guidelines and
Discount Rates for Benefit-Cost Analysis
FROM: Henry L. Longest II, Director L%J|.K f
Office of Emergency and Remedial Response
TO: Waste Management Division Directors
Regions I, IV, V, VII
Emergency and Remedial Response Division,Director
Region II
Hazardous Waste Management Division Directdrs .,
Regions III, VI, VIII, IX
Hazardous Waste Division Director
Region X
PURPOSE
This memorandum revises the discount rate used in cost
estimation for Superfund activities to 7%. This discount rate
should be used in estimating the present worth value for
potential alternatives in the remedial investigation/feasibility
study and for remedial actions.
BACKGROUND
The Office of Management and Budget (OMB) revised Circular
A-94 which provides guidance on conducting benefit-cost, cost-
effectiveness, and lease-purchase analyses. Circular A-94 also
revises the discount rates to be used in conducting such
analyses. The previous OMB guidance, issued in 1972, directed
federal agencies to use a 10% discount rate; the current
guidance, issued on October 29, 1992, directs agencies to use a
7% discount rate.
In the preamble to the National Oil and Hazardous Substances
Contingency Plan (March 8,1990), EPA stated that it would follow
Recycled/Recyclable
Printed with Soy/Canola Ink on paper that
contains at least 50% recycled fiber
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CIRCULPLR NO. A-94
Revised
(Transmittal Memo No. 64)
MEMORANDUM FOR HEADS OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS
SUBJECT: Guidelines and Discount Rates for Benefit-Cost Analysis
- of Federal Programs
Table of Contents
1. Purpose 2
2. Rescission 2
3. Authority 2
4. Scope 2
5. General Principles 3
a. Net Present Value and Related Outcome Measures
b. Cost-Effectiveness Analysis
c. Elements of Benefit-Cost or Cost—Effectiveness
Analysis
6. Identifying and Measuring Benefits and Costs 5
a. Identifying Benefits and Costs
b. Measuring Benefits and Costs
7. Treatment of Inflation 7
a. Real or Nominal Values
b. Recommended Inflation Assumption
8. Discount Rate Policy 8
a. Real versus Nominal Discount Rates
b. Public Investment and Regulatory Analyses
c. Cost-Effectiveness, Lease—Purchase, Internal
Government Investment, and Asset Sale Analyses
9. Treatment of Uncertainty 12
a. characterizing Uncertainty
b. Expected Values
c. Sensitivity Analysis
d. Other Adjustments for Uncertainty
10. Incidence and Distributional Effects 13
a. Alternative Classifications
b • Economic Incidence
11. Special Guidanc. for Public Investment Analysis 14
a. Analysis of Excess Burdens
b. Exception.
12. Special Guidance for Rsgulatory Impact Analysis 14
13. Special Guidance for Lease-Purchase Analysis 15
a. Coverage
b. Required Justification for Leases
C. Analytical Requirements and Definitions
14. Related Guidance 19
15. Implementation 19
16. Effective Date 19
17. Interpretation 20
Appendix A: Definitions of Terms
Appendix B: Additional Guidance for Discounting
Appendix C: Discount Rates for Cost-Effectiveness, Lease—
Purchase, and Related Analyses
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1. Pi p u. The goal of this Circular is to promote efficient
resource allocation through veil-informed decisionmaking by the
Federal Government. It provides general guidance for conducting
benefit—cost and cost-effectiveness analyses. It also provides
specific guidance on the discount rates to be used in evaluating
Federal programs whose benefits and costs are distributed over
time. The general guidance will serve as a checklist of whether
an agency has considered and properly dealt with all the elements
for sound benefit—cost and cost-effectiveness analyses.
2. I pci.sio . This Circular replaces and rescinds Office of
Management and Budget (0MB) Circular No. A—94, “Discount Rates to
Be Used in Evaluating Time-Distributed Costs and Benefits,” dated
March 27, 1972, and Circular No. A—104, “Evaluating Leases of
Capital Assets,” dated Jun. 1, 1986, which has been rescinded.
Lease-purchase analysis is only appropriate after a decision has
been made to acquire the services of an asset. Guidance for
lease-purchase analysis is provided in Section 8 • c. (2) and
Section 13.
3. This Circular is issued under ths authority of
31 U.S.C. Section 1111 and the Budget and Accounting Act of 1921,
as amended.
4. D.c u. This Circular does not supersede - agency practices
which are prescribed by or pursuant to law, Executive Order, or
other relevant Circular’s. The Circular’s guidelines are sug-
gested for use in the internal planning of Executive Branch
agencies. The guidelines must be followed in all analyses
submitted to 0MB in support of legislative and budget programs in
compliance with 0MB Circulars No. k -il, “Preparation and Submis-
sion of Annual Budget Estimates,” and No. A- ’19, “Legislative
Coordination and Clearance.” These guidelines must also be
followed in providing estimates sub—itted to 0MB in compliance
with Executive Order No. 12291, “Federal Regulation,” and the
President’s April 29, 1992 memorandum requiring ben.f it—cost
analysis for certain legislativ, proposals.
a. Aside from the exceptions listed below, the guidelines in
this Circular apply to any analysis used to support Govern-
ment decisions to initiate, rsnev, or expand program or
projects which would result in a s.ri.s of: aasurable bene-
f it. or - costs extending for three or more years into the
future. Th. Circular applies specifically to:
(1) Benefit—cost or cost-effectiveness analysis of Federal
programs or policies.
(2) Rgulatory impact analysis.
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(3) Analysis of decisions whether to lease or purchase.
(4) Asset valuation and sale analysis.
b. Specifically exempted from the scope of this Circular are
decisions concerning:
(1) Water resource projects (guidance for which is the
approved Economic and Environmental PrinciDles afl4
Guidelines for Water and Related Land Resources
ImDlementation Studies) .
(2) The acquisition of commercial—type service, by Govern-
ment or contractor operation (guidance for which is 0MB
Circular No. A-76).
(3) Federal energy management programs (guidance for which
can be found in the Federal Reaister of January 25,
1990, and November 20, 1990).
c. This Circular applies to all agencie. of the Executive
Branch of the Federal Government. It do.. not apply to the
Government of the District of Columbia or to non-Federal
recipients of loans, contracts or grants. Recipients are
encouraged, however, to follow the guidelines provided here
when preparing analyses in support of Federal activities.
d. For small projects which share similar characteristics,
agencies are encouraged to conduct generic studies and to
avoid duplication of effort in carrying out economic
analysis.
5. 1n.ral Prineisl.s . Ben•f it-cost ma1ysis is recommended as
the technique to use in a formal economic analysis of Government
progr* . or projects. Cps*-s t.otjyan.s. analysis i a less corn-
P* *SI VetchnjqU., but it C S be appropriat.Wh.n t s benefits
from competing alternatives are the sam . or wh.çe a pqUcy
dect.jOfl he. been mada that the benefits must be provided.
(Appendix £ provides a glossary of technical terms used in this
Circular; technical terms are bolded when they first appear.)
a • Bet Present Value and 1 .lat.d Outc ap Beaavras • The
standard criterion for deciding whether a Government program
can be justified on Scononic principles is net present value
- — the discounted monetized value of expected net benefits
(i.e., benefits minus costs). Net present value is computed
by assigning monetary values to benefits and costs, dis-
counting future benefits and costs using an appropriate
discount rate, and subtracting the sum total of discounted
costs from the sum total of discounted benefits. Discount-
ing benefits and costs transforms gains and losses occurring
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in different time periods to a common unit of meat
Programs with positive net present value increase
resources and are generally preferred. Programs wi
negative net present value should generally be avoid
(Section 8 considers discounting issues in more detai.
Although net present value is not always computable (an
does not usually reflect effects on income distribution)
efforts to measure it can produce useful insights even wh
the monetary values of some benefits or costs cannot be
determined. In these cases:
(1) A comorehensive enumeration of the different types of
benefits and costs, monetized or not, can be helpful in
identifying the full range of program effects.
(2) ouant .fving benefits and costs is worthwhile, even when
it is not feasible to assign monetary values; bicL] 1
measuremqflt s may be possible and useful.
Other n arv effectiveness measures can provide useful
supplementary information to net present value, and analysts
are encouraged to report them also. Examples include the
number of injuries prevented per dollar of cost (both
measured in present value terms) or a project’s internal
rate of return.
b. Cpst-Effectiveflesa Analysis . A program is costeffSCti’1
if, on the basis of life cycle’ coat analysis Of competing
alternatives, it is determined to have, the lowest costs
expressed in present value terms for ,a given amount of
benefits. Cost—effectiveness analysis is appropriate when
ever it is unnecessary or impractical to consider the doubt
v a1ue of the b.n.f its provided by the alternatives under
consideration. This is the case whenever (i) each alter-
native has the same annual benefits expressed in monetarY
terms; or (ii) each alternative has the same annual effects,
but dollar values cannot be assigned to their benefits.
Analysis of alternative defense systems often falls in this
category. -
Cost—effectiveness analysis can also be used to compare
programs with identical costs but diffezi119 benefits.’ In
this case, the decision criterion is the discounted present
value of benefits. The alternative program with the largest
benefits would normally be favored. -
C. I1 1 uti-
rT. 4ç -rT1 ) cn
An SlVIiI .
(1) Policy lationala . The rational. for the Government
program being examined should be clearly stated in the
analysis. Progrk may be justified on efficienCY
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grounds where they address market failure, such as
public goods and externalities. They may also be
justified where they improve the efficiency of the
Government’s internal operations, such as cost-saving
investments.
(2) ExDlicit klsuaDtions . Analyses should be explicit
about the underlying assumptions used to arrive at
estimates of future benefits and costs. In the case of
public health programs, for example, it may be neces-
sary to make assumptions about the number of future
beneficiaries, the intensity of service, and the rate
of increase in medical prices.- The analysis should
include a statement of the assumptions, the rationale
behind them, and a review of their strengths and weak-
nesses. Key data and results, such as year-by-year
estimates of benefits and costs, should be reported to
promote independent analysis and review.
(3) Evaluation of ltsrnativss . Analyses should also
consider alternative means of achieving program
objectives by examining different program
different of provision, and 4ifferent degrees
of Government jpvolvement . For example, in evaluating
a decision to acquire a capital asset, the analysis
should generally consider: Ci) doing nothing; (ii)
direct purchase; (iii) upgrading, renovating, sharing,
or converting existing Government property; or (iv)
leasing or contracting for services.
(4) Verification. Retrospective studies to determine
whether anticipated benefits and costs have been
realized are potentially valuable. Such studies can be
used to determine necessary corrections in existing
programs, and to improve future estimates of benefits
and costs in these program. or related ones.
Agencies should have a plan for periodic, results-
oriented evaluation of program effectiveness. They
should also discuss the results of relevant evaluation
studies when proposing reauthorizations or increased
program funding.
6. Idantifvina and X.a.urinp Benefits and Cost. . Analyses
should include comprehensive estimates of the sxpe ed benefits
and costs to based on established definitions and prac-
tices for program and policy evaluation. Social net benefits,
and not the benefits and costs to the Federal Government, should
be the basis for evaluating Government programs or policies that
have effects on private citizens or other levels of Government.
Social benefits and costs can differ from private benefits and
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costs as measured in the marketplace because of imperfections
arising from: (i) external •cone iaS or diseconemies where
actions by one party impose benefits or costs on other groups
that are not compensated in the market place; (ii) monopoly power
that distorts the relationship between marginal costs and market
prices; and (iii) taxes or subsidies.
a. Identifying Benefits and Costs . Both intangible and tan-
gible benefits and costs should be recognized. The relevant
cost concept is broader than private-sector production and
compliance costs or Government cash expenditures. Costs
should reflect the opportunity cost of any resources used,
measured by the return to those resources in their most
productive application elsewhere. Mlow ar. some guidelines
to consider when identifying benefits and costs.
(1) incremental B•n•f its and Costs . Calculation of net
present value should be based on incremental benefits
and costs. Bunk costs and realized benefits should be
ignored. Past experience is relevant only in helping
to estimate what the value of future benefits and costs
might be. Analyses should take particular care to
identify the extent to which a policy such as a subsidy
program promotes substitutes for activities of a
similar nature that would occur without the policy.
Either displaced activities should be explicitly
recorded a. costs or only incremental gains should be
recorded as benefits of the policy.—
(2) ! nt.rsctive If f.cta . Possible interactions between the
benefits and costs being analyzed and other Government
activities ‘should be considered. For example, policies
affecting, agricultural output should reflect real
economic values, as opposed to subsidized prices.
(3) int.rmational If f.cts . Analyses should focus on
benefits and costs accruing to the citizens of the
United Stats in determining net present value. Where
progra or projects have effects outside the United
States, these effects should be reported separately.
(4) Tx.udBu. There are no economic gains from a pure
transfer payment because the benefits to those who
receive such a transfer are matched by the costs borne
by those who pay for it • Therefore, transfers should
be excluded from the calculation of net present value.
Transfers that aris, as a result of the program or
project being analyzed should be identified as such,
however, and their distributional effscts discussed.
It should also be recognized that a transfer program
may have benefits that are less than the program’s real
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economic costs due to inefficiencies that can arise in
the program’s delivery of benefits and financing.
b. X.asurina B.n.f it. and Cost. . The principle of willingness-
to-pay provides an aggregate measure of what individuals are
willing to forgo to obtain a given benefit. Market prices
provide an invaluable starting point for measuring willing-
ness-to-pay, but prices sometimes do not adequately reflect
the true value of a good to society. Externalities, monop-
oly power, and taxes or subsidies can distort market prices.
Taxes, for example, usually create an .me... burden that
represents a net loss to society. (The appropriate method
for recognizing this excess burden in public investment
analyses is discussed in Section 11.) In other cases,
market prices do not exist for a relevant benefit or cost.
When market prices are distorted or unavailable, other
methods of valuing benefits may have to be employed.
Measures derived from actual market behavior are preferred
when they are available.
(1) Inframarainal B.m.f its and Costs . Consumers would
generally be willing to pay more than the market price
rather than go entirely without a good they consume.
The economist’s concept of consumer surplus measures
the extra value consumers derive from their consumption
compared with the value measured at market prices.
When it can be determined, consumer surplus provides
the -best measure of the total benefit to society from a
Government program or project • Consumer surplus can
sometimes be calculated by using econometric methods to
estimate consumer demand.
(2) Indirect Xa •s of En. it. anCostp. Willingness-
to-pay can sometimes be estimated indirectly through
changes in land values, variations in wage rates, or
other methods • Such methods ar. most reliable when
they ar. based on actual market transactions. Measures
should be consistent with basic economic principles and
should be r.plicable.
(3) n1tinlir If feats . Generally, analyses should treat
reaources as if they were likely to be fully employed.
Employment or output multipliers that purport to
measure the secondary effects of government expendi-
tures on employment and output should not be included
in measured social benefits or costs.
7. Tr.ata.nt of Inflation . Future inflation is highly uncer-
tain. Analysts should avoid having to make an assumption about
the general rate of inflation whenever possible.
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a. Real or Mominal Values . Economic analyses are often most
readily accomplished using real or constant-dollar values,
i.e., by measuring benefits and costs in units of stable
purchasing power. (Such estimates may reflect expected
future changes in relative prices, however, where there is a
reasonable basis for estimating such changes.) However,
where future benefits and costs are given in nominal terms,
i.e., in terms of the future purchasing power of the dollar,
the analysis should use these values rather than convert
them to constant dollars as, for example, in the case of
lease-purchase analysis.
Nominal and real values must not be combined in the same
analysis. Logical consistency requires that analysis be
conducted either in constant dollars or in terms of nominal
values. This nay require converting some nominal values to
real values, or vice versa.
b. R.con.nded Inflation IssunDtion . Wh.n a general inflation
assumption is needed, the rate of increase in the Gross
Domestic Product deflator from the Administration’s economic
assumptions for the period of the analysis is recommended.
For projects or programs that extend beyond the six-year
budget horizon, the inflation assumption can be extended by
using the inflation rate for the sixth year of the budget
forecast. The Administration’s economic forecast is updated
twice annually, at the time the budget is published in Janu-
ary or February and at the time of-the Mid-Session Review of
the Budget in July. . Alternative inflation estimates, based
on credible private sector forecasts, may be used for
sensitivity analysis. - - -
8. Discount late Policy . - In order to compute net present
value, it is necessary to discount future benefits and costs.
This discounting ref lscts.the time value of money. Benefits and
costs are worth more if they are experienced sooner • All future
benefits and costs, including nonmonetized benefits and costs,
should be discounted. The higher the discount rate, the lower is
the present value of future cash flows. - For typical investments,
with costs concentrated in early periods and benefits following
in later p.riods, raising the discount rate tends to reduce the
net present value. (Technical guidance on discounting and a table
of discount factors are provided in Appendix B.)
a • Real versus Nn& al Discount Rates • The proper discount
rate to use depends on whether the benefits and costs are
measured in real or nominal terms.
(1) A real discount rate that has been adjusted to elimi-
nate the effect of expected inflation should be used to
discount constant-dollar or real benefits and costs. A
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real discount rate can be approxin ated by subtracting
expected inflation from a nominal interest rate.
(2) A nominal discount rate that reflects expected infla-
tion should be used to discount nominal benefits and
costs. Market interest rates are nominal interest
rates in this sense.
b. Public Investment and Reaulatory Analyses . The guidance in
this section applies to benefit—cost analyses of public
investments and regulatory programs that provide benefits
and costs to the general public. Guidance related to cost-
effectiveness analysis of internal planning decisions of the
Federal Government is provided in Section B.c.
In general, public investments and regulations displace both
private investment and consumption. To account fort this
displacement and to promote efficient investment and regu-
latory policies, the following guidance should be observed:
(1) Base—case )nalysJs . Constant-dollar benefit-cost
analyses of proposed investments and regulations should
report net present value and other outcomes determined
using a real discount rate of 7 percent. This rate
approximates the marginal pretax rate of return on an
average investment in the private sector in recent
years. Significant changes in this rate will be re-
flected in future updates of this Circular.
(2) Other Discount Rates . Analyses should show the sensi-
tivity of the discounted net present value and other
outcomes to variations in the discount rate. The im-
portance of these alternative calculations will depend
on the specific economic characteristics of the program
under analysis. For example, in analyzing a regulatory
proposal whose main cost is to reduce business invest-
ment, net present value should also be calculated using
a higher discount rate than 7 percent.
Analyses may include among the reported outcomes the
imt.rnal rat. of return implied by the stream of
benefits and costs. The internal rate of return is the
discount rate that sets the net present value of the
program or project to zero. While the internal rate of
return does not generally provide an acceptable deci-
sion criterion, it does provide useful- i ornation,
particularly when budgets are constrained or there is
uncertainty about the appropriate discount rate.
(3) Using the shadow price of capital to value benefits and
costs is the analytically preferred means of capturing
the effects of Government projects on resource
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allocation in the private sector. TO use this iiiethod
accurately, the analyst must be able to compute how the
benefits and costs of a program or project affect the
allocation of private consumption and investment. OliB
concurrence is required if this method is used in place
of the base case discount rate.
c. Cost-if fsctiVsnell L.a.s-PUrCh&I. Intsrnal Government
Ii v.,t*.flta and Ms t Sal. ja1yiI . The Treasury’s
borrowing rates should be used a. discount rates in the
following cases:
(1) C. .t-iff .CtiUfl• 51 ns1vsii . Analyses that involve
constant-dollar costs •hould use the real Treasury
borrowing rate on marketable secu’ities of comparable
- - maturity to the period of analysis. This rate is com-
puted using the Administration’s •‘conomic assumptions
for the budget, which are published in January of each
year. A table of discount rates based on the expected
interest rates for the first year of the budget f ore-
cast is presented in Appendix C of this Circular.
Appendix C is updated annually and is available upon
request from 0MB. Real Treasury rates are obtained by
removing expected inflation over the period of analysis
from nominal Treasury interest rates. (Analyses that
involve nominal costs should use nominal Treasury rates
for discounting, as described in the following para-
graph.) -
(2) L.a..—PUrCb* 5S analysis . Analyses of nominal lease
payments should us. th. nominal Treasury borrowing rate
on marketable securities of comparable maturity to the
period of analysis. Nominal Treasury borrowing rates
should be taken from the economic assumptions for the
budget. A table of discount rates based on these as-
sumptions is presented in Appendix C of this Circular,
which is updated annually. - (Constant dollar lease-
purchas. analyses should use the real Treasury
borrowing rate, described in the preceding paragraph.)
(3)
_____________. Some Federal
investment. provide intsrnal 5 benefits which take the
form of increased Federal r.venues or decreased Federal
costs • An .‘ ple would be an investment in an energy-
efficient building system that reduces Federal
op.rating costs. Unlike the cas, of a Federally funded
highway (which provides U terp.alU benefits to society
as a whole), it is appropriate to calculate such a
project’s net present value using a comparable-maturity
Treasury rate as a discount rate. The rate used may be
either nominal or real, depending on how benefits and
costs ar. measured.
i •f !A4) t)1 \iI I -
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Some Federal activities provide a mix of both Federal
coat savings and external social benefits. For
example, Federal investments in information technology
can produce Federal savings in the form of lower
administrative costs and external social benefits in
the form of faster claims processing. The net present
value of such investments should be evaluated with the
7 percent real discount rate discussed in Section Lb.
unless the analysis is able to allocate the
investment’s costs between provision of Federal cost
savings and external social benefit.. Where such an
allocation is possible, Federal cost savings and their
associated investment costs may be discounted at the
Treasury rate, while the external social benefits and
their associated investment costs should be discounted
at the 7 percent real rate.
(4) Asset Sale Analysis . Analysis of possible asset sales
should reflect the following:
(a) The net present value to the Federal Government of
holding an asset is best measured by discounting
its future earnings stream using a Treasury rate.
The rate used may be either nominal or real,
depending on how earnings are measured.
(b) Analyses of Government asset values should
explicitly deduct the cost of expected defaults or
delays in payment from projected cash flows, along
with Government administrative costs. Such
analyses should also consider explicitly the prob-
abilities of events that would cause the asset to
become nonfunctional, impaired or obsolete, as
well as probabilities of events that would
increase asset value.
(C) Analyse. of possible asset sales should assess the
gain in social efficiency that can result when a
Government asset is subject to market discipline
and private incentive.. Even though a Government
asset may be used more efficiently in the private
sector, potential private-sector purchasers will
generally discount such an asset’s earnings at a
rate in excess of the Treasury rate, in part, due
to the cost of bearing risk. When there is
evidence that Government assets can be used more
efficiently in the privat. sector, valuation
analyses for these assets should include sensi-
tivity comparisons that discount the returns from
such assets with the rate of interest earned by
assets of similar riskiness in the private sector.
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9. Treatment of nc.rtaintY . Estimates of benefits and costs
are typically uncertain because of imprecision in both underlying
data and modeling assumPtions. Because such uncertainty is basic
to many analyses, its effects should be analyzed and reported.
Useful information in such a report would include the key sources
of uncertainty; expected value estimates of outcomes; the sensi-
tivity of results to important sources of uncertainty; and, where
possible, the probabilitY distributions of benefits, costs, and
net benefits.
a. Q1iaracteri1i ncert*intV . Analyses should attempt to
characterize the sources and nature of uncertainty.
Ideally, probabilitY distributiOns of potential benefits,
costs, and net benefits should be presented. It- should be
recognized that many phenomena that are treated as deter-
ministic or certain are, in fact, uncertain. In analyzing
uncertain data, objective estimates of probabilities should
be used whenever possible. Market data, such as private
insurance payments or interest rate differentials, may be
useful in identifying and estimating relevant risks. Sto-
chastic simulation -methods can be useful for analyzing suCh
phenomena and developing insights into the relevant
probability distributions In any case, the basis for the
probability distribution assumptions should be reporte4.
Any limitations of the analysis because of uncertainty or
biases surrounding data or assumptions should be discussed.
b. m .ct.d Values . The expected values of-. the distributions
of benefits, costs, and net benefits can:be obtained by
weighting each outcome by its probability of occurrence, and
then s” ing across all potential outcomes. it estimated
benefits , - costs, and net benefits are characterized by point
estimates rather than as probability distributions, the
expected value (an unbiased estimate) is the appropriate
estimate for use.
Estimates that differ from expected values (such as worst
case estimates) may be provided in addition to expected
values, but the- rationale for such estimates must be clearlY
presented. For any such estimate, the analysis should iden-
tify the nature and magnitude of any bias • For example,
studies of past activities have documented tendencies for
cost growth beyond initial .xpectations analyses should
consider whether past experience suggests that initial
estimates of benefits or costs are optimistic.
C. InILtLVitV )ni lYsiC . Major assumptions should be varied
and net present value and other outcomes recomputed to
determine how sensitive outcomes are to changes in the
assumptions. The assumptions that deserve the most atten-
tion will depend on the dominant benefit and cost elements
and the areas of greatest uncertainty of the program being
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analyzed. For examp]e, in analyzing a retirement program,
one would consider changes in the number of beneficiaries,
future wage growth, inflation, and the discount rate. In
general, sensitivity analysis should be considered for esti-
mates of: (i) benefits and costs; (ii) the discount rate;
(iii) the general inflation rate; and (iv) distributional
assumptions. Models used in the analysis should be veil
documented and, where possible, available to facilitate
independent review.
d. Other Adluitmanti for Unc.rtaintv . The absolute variability
of a risky outcome can be much less significant than its
correlation with other significant determinants of social
welfare, such as real national income. In general, vari-
ations in the discount rate are not the appropriate method
of adjusting net present value for the special risks of
particular projects. In some cases, it may be possible to
estimate c.rtainty -eguival.nts which involve adjusting
uncertain expected values to account for risk.
10. Incidenc, and Distributional If facts . The principle of
maximizing net present value of benefits is based on the premise
that gainers could fully compensate the losers and still be
better of f. The presence or absence of such compensation should
be indicated in the analysis. When benefits and costs have sig-
nit icant distributional effects, these effects should be analyzed
and discussed, along with the analysis of net present value.
(This will not usually be the case for cost—effectiveness
analysis where the scope of Government activity is not changing.)
a. Alternative Classifications . Distributional effects may be
analyzed by grouping individuals or household. according to
incom, class (e.g., income quintile .), geographical region,
or demographic group (e.g., age). Other classifications,
such as by industry or occupation, may be appropriate in
some circumstances.
Analysis should aim at identifying the relevant gainers and
losers from policy decisions. Effects on the preexisting
assignment of property rights by the program under analysis
should be reported. Where a policy is intended to benefit a
epsoified subgroup of the population, such as the poor, the
analysis should considar how effective the policy is in
reaching it. targeted group.
b. Iconomic Incidence . Individuals or households are the ulti-
mate recipients of incoze; business enterprises are merely
intermediaries. Analyses of distribution should identify
economic incidence, or how costs and benefits are ultimately
borne by households or individuals.
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— 14 —
Determining economic incidence can be difficult because
benefits and costs are often redistributed in unintended and
unexpected ways. For example, a subsidy for the production
of a commodity will, usually raise the incomes of the com-
modity’s suppliers, but it can also benefit consumers of the
commodity through lover prices and reduce the incomes for
suppliers of competing products. A subsidy also raises the
value of specialized resources used in the production of the
subsidized commodity. As the subsidy is incorporated in
asset values, its distributional effects can change.
ii. •peçipl Gu anCS for P” lia I v.Itatflt k a1yIiI. This gui-
dance applies only to public investments with social benefits
apart from decreased Federal costs. It is not required for cost-
effectiveness or lease-purchase analyses. Because taxes gener-
ally distort relative prices, they impose a burden in excesS of
the revenues they raise. Recent studies of the u.s. tax system
suggest a range of values for the marginal excess burden, of
which a reasonable estimate is 25 cents per dollar of revenue.
a. na1 .ii of c.u Burden. . The presentation of results for
public investments that are not justified on cost—saving
grounds should include a supplementary analysis with a 25
percent excess burden. Thus, in such analyses, costs in the
form of public expenditures should be multiplied by a factor
of 1.25 and net present value recomputed.
b. lircoptiona. . Where specific - information’ clearly suggests
that the excess- burden is lower. (or higher) than 25 percent,
analyses may use a different figure. -When a different
figure is used an explanation should be. provided for it. An
example of such an exception is an investment funded by user
charges that function like market prices;, in this case the
excess burden would be zero • Another example would be a
project that provides both cost savings to the Federal
Government and external social benefits.. If it is possible
to make a quantitative determination of the portion of this
project’s costs that givs rise to Federal savings, that
portion of the costs may be .xeaptsd from multiplication by
the factor of 1.25.
12. ip.cial inidanos for I.aulaterv Immeot An 1V5iS . Additional
guidance for analysis of regulatory policies is provided in E 1
] tQry Prpgram of th U 4 ed Stases Go !ern! eflt which is published
annually by 0MB. (see “Regulatory Impact Analysis Guidance,
Appendix V of R.aulatorV Proaram of the United States Government
for April 1, 1991 to March 31, 1992.)
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— 15 —
13. BD.cial Quidanc. for L•ase-purphpi. Malv.j . The special
guidance in this section does not apply to the decision to
acquire the use of an asset. In deciding that, the agency should
conduct a benefit—cost analysis, it possible. Only after the
decision to acquire the services of an asset has been made is
there a need to analyze the decision whether to lease or
purchase.
a. The Circular applies only when both of the
following tests of applicability are satisfied:
(1) The lease-purchase analysis Concerns a capital asset,
(including durable goods, equipment, buildings, facil-
jties, installations, or land) which:
- (a) Is leased to the Federal Government for a term of
three or more years; or,
(b) Is new, with an economic life of less than three
years, and leased to the Federal Government for a
term of 75 percent or more of the economic life of
the asset; or,
(c) Is built for the express purpose of being leased
to the Federal Government; or,
(d) Ii leased to the Federal Government and clearly
has no alternative commercial use (e.g., a
special-purpose government installation).
(2) The lease—purchase analysis Concerns a capital asset or
a group of related assets whose total fair market value
exceeds $1 million.
b. All leases of capital
assets must be justified as preferable to direct government
Purchase and ownership. This can be done in one of three
ways:
(1) By conducting a separate lease-purchase analysis. This
is the only acceptable method for major acquisitio .
A lease represents a major acquisition if:
(a) The acquisition represents a separate line-item in
the agency’ s budget;
(b) The agency or 0MB determines the acquisition is a
major one; or
(c) The total purchase price of the asset or group of
assets to be leased would exceed $500 million.
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— 16 —
(2) By conducting periodic lease-purchase analyses of re-
current decisions to lease similar assets used for the
same general purpose. Such analyses would apply to the
entire class of assets. 0MB approval should be sought
in determining the scope of any such generic analysis.
(3) By adopting a formal policy for smaller leases and
submitting that policy to the 0MB for approval.
Following such a policy should generally result in the
same lease—purchase decisions as would conducting
separate lease-purchase analyses. Before adopting the
policy, it should be demonstrated that:
(a) The leases in question would generally result in
substantial savings to the Government that could
not be realized on a purchase;
(b) The leases are so small or so short—term as to
make separate lease-purchase analysis impractical;
and
(c) Leases of different types are scored consistently
with the instructions in Appendices B and C of 0MB
Circular No. A-li.
C. 1’ 1yticaj l.quirmantg pn4 Def4 ions. Whenever a Federal
agency needs to acquire the use of a capital asset, it
should do so. in the way that is least expensive fur the
Government as a whole. . . . .. - - -
(1) Life Cycle Cost . Lease-purchase analyses should
compare the net discounted present value of the hf a-
cycle cost of leasing with the full costs of buying or
constructing an identical asset. The full costs of
buying include the asset’s purchase price plus the net
discounted present value of any relevant ancillary
services connected with the purchase. (Guidance on the
discount rat. to use for lease-purchase analysis is
provided in Section B.C.)
(2) Isonissic Life . For purposes of lease—purchase analy-
sis, the economic life of an asset is its remaining
physical or productiv, lifetime. It begins when the
asset is acquired and ends when the asset is retired
from service. The economic life is frequently not the
same as the useful life for tax purposes.
(3) Purchase Pric. . The purchase price of the asset for
purposes of lease—purchase analysis is its fair market
value, defined as the price a willing buyer could rea-
sonably expect to pay a willing seller in a competitive
market to acquire the asset.
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— 17 —
(a) In the case of property that is already Owned by
the Federal Government or that has been donated or
acquired by condemnation, an imputed purchase
price should be estimated. (Guidance on making
imputations is provided in Section 13.c.(6).)
(b) If public land is used for the site of the asset,
the imputed market value of the land should be
added to the purchase price.
(C) The asset’s estimated residual value, as of the
end of the period of analysis, should be subtract-
ed from its purchase price. (Guidance on estimat-
ing residual value is provided in Section
l3.c.(7).)
(4) lizu. In analyzing the cost of a lease, the normal
payment of taxes on the lessor’s income from the lease
should not be subtracted from the lease costs since the
normal payment of taxes will also be reflected in the
purchase .- The cost to the Treasury of special tax
benefits, if any, associated with the lease should be
added to the cost of the lease. Examples of such tax
benefits might include highly accelerated depreciation
allowances or tax—free financing.
(5) Ancillary Services . If the terms of the lease include
ancillary services provided by the lessor, the present
value of the cost of obtaining these services separ-
ately should be added to the purchase price. Such
costs may be excluded if they are estimated to be the
same for both lease and purchase alternatives or too
small to affect the comparison. Examples of ancillary
services include:
(a) All costs associated with acquiring the property
and preparing it for use, including construction,
installation, site, design, and management costs.
(b) Repair and improvement costs (if included in lease
payments).
(c) Operation and naintenanc. costs (if included in
lease payments).
(d) Imputed property taxes (excluding foreign property
taxes on overseas acquisitions except where actu-
ally paid). The imputed taxes approximate the
costs of providing municipal services such as
water, sewage, and police and fire protection.
(See Section (6) below.)
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— 18 —
(e) Imputed insurance premiums. (See Section (6)
below.)
(6) ! stiaatin Imnuted Costs . Certain costs associated
with the Federal purchase of an asset may not involve a
direct monetary payment. Some of these imputed costs
may be estimated as follows:
(a) p”cha e Pr .0e. An imputed purchase price for an
asset that is already owned by the Federal Govern-
ment or which has been acquired by donation or
condemnation should be based on the fair market
value of similar properties that have been traded
on commercial markets in the same or similar
localities. The same method should be followed in
estimating the imputed value of any Federal land
used as a site for the asset.
(b) Prom•rtv Taz•s . Imputed property taxes may be
estimated in two ways.
(i) Determine the property tax rate and assessed
(taxable) value for comparable property in
the intended locality. If there is no basis
on which to estimate future changes in tax
rates or assessed values, the first-year tax
rate and assessed value (inflation adjusted
for each subsequent year) can be applied to
• all years.:’ Multiply the— assessed- value by
the tax rate to determine the annual imputa—
•tion for property taxes.
- (ii) As an alternative to step (i) above, obtain
an estimate of the current local effective
property tax rate from the Building Owners
and Managers Association’ s Regional Exchange
Reports. Multiply the fair market value of
the Government-owned property (inflation
adjusted for each year) by the effective tax
rats.
(C) Insurance Premiums . Determine local estimates Of
standard commercial coverage for similar property
from the Building Owners and Managers Associa-
tion’s Regional Exchange Reports.
(7) issidual Value . A property’s residual value is an
estimate of the price that the property could be sold
for at the end of the period of the lease-purchase
analysis, measured in discounted present value terms.
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— 19 —
(a) The recommended way to estimate residual value is
to determine what similar, comparably aged prop-
erty is currently selling for in commercial
markets.
(b) Alternatively, book estimates of the resale value
of used property may be available from industry or
Government sources.
(C) Assessed values of similar, comparably aged prop-
ertie. determined for property tax purposes may
also be used.
(8) Renewal Omtion. . In determining the term of a lease,
all renewal options shall be added to the initial lease
period.
14. R•lat•d Guidance .
a. 0MB Circular No. A-il, “Preparation and Submission of Annual
Budget Estimates.”
b. 0MB Circular No. A-19, “Legislative Coordination and
Clearance.” -
c. 0MB Circular No. A-70, “Federal Credit Policy.”
d. 0MB Circular No. A-76, “Performance of Commercial
Activities.”
e. 0MB Circular No. A-109, “Policies to Be Followed in the
Acquisition of Major Systems.”
f. 0MB Circular No. A-130, “Management of Federal Information
Resources.”
g. “Joint 0MB and Treasury Guidelines to the Department of
Defense Covering Lease or Charter Arrangements for Aircraft
and Naval Vessels.”
h. Executive Order 12291, “Federal Regulation.”
i. “Regulatory Impact Analysis Guidance,” in Reaulatory Program
of the United States Government .
j. “Federal Energy Management and Planning Programs; Life Cycle
Cost Methodology and Procedures,” Federal R.ai.ter , Vol • 55,
No. 17, January 25, 1990, and Vol. 55, No. 224, November 20,
1990.
k. Presidential Memorandum of April 29, 1992, “Benefits and
Costs of Legislative Proposals.”
15. Immluantation . Economic analyses submitted to 0MB will be
reviewed for conformity with items 5 to 13 in this Circular
through the Circular No. A-li, budget justification and submis-
sion process, and Circular No. A-l9, legislative review process.
16. Effective Date . This Circular is effective immediately.
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— 20 —
17. xnt.r r.tation . QuestionS concerning interpretation of this
Circular should be addressed to the Office of Econoaic Policy,
Office of Manageaent and Budget (202—395—5873) or, in the case of
regulatory issues and analysis, to the Office of Information and
Regulatory Affairs (202—395—4852).
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APPEEDIX A
DEPIN ITtOw 07 TERMS
Benefit-Cost Analysis -— A systematic quantitative method of
assessing the desirability of Government projects or policies
when it is important to take a long view of future effects and a
broad view of possible side-effects.
Tangible property, including durable goods,
equipment, buildings, installations, and land.
Certainty...aujyp lent -- A certain (i.e., nonrandom) outcome that
an individual values equally to an uncertain outcome. For a
risk—averse individual, the certainty-equivalent for an uncertain
set of benefits may be less than the mathematical expectation of
the outcome; for example, an individual may value a 50-50 chance
of winning $100 or $0 as only $45. Analogously, a risk—averse
individual may have a certainty equivalent for an uncertain set
of costs that is larger in magnitude than the mathematical
expectation of costs.
Cost—Effectiveness Analysis —— A systematic quantitative method
for comparing the costs of alternative means of achieving the
same stream of benefits or a given objective.
Consumer Surmius —— The maximum sum of money a consumer would be
willing to pay to consume a given amount of a good, less the
amount actually paid. It is represented graphically by the area
between the demand curve and the price line in a diagram repre-
senting the consumer’s demand for the good as a function of its
price.
-— The interest rate used in calculating the
present value of expected yearly benefits and costs.
Discount Factor -- The factor that translates expected benefits
or costs in any given future year into present value terms. The
discount factor is equal to 11(1. + i ) ’ where I is the interest
rate and t is is the number of years from the date of initiation
for the program or policy until the given future year.
Excess Eurden —- Unless a tax is imposed in the form of a lump—
sum unrelated to economic activity, such as a head tax, it will
affect economic decisions on the margin. Departures from eco-
nomic efficiency resulting from the distorting affect of taxes
are called excess burdens, because they disadvantaç” society
without adding to Treasury receipts. This concept is also
sometimes referred to as deadweight loss.
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External Economy or Diseconomy -— A direct effect, either posi-
tive or negative, on someone’s profit or welfare arising as a by-
product of some other person’s or firm’s activity. Also referred.
to as neighborhood or spillover effects, or externalities for
short.
Incidence — The ultimate distributional effect of a tax, expend-
iture, or regulatory program.
Inflation -— The proportionate rate of change in the general
price level, as opposed to the proportionate increase in a
specific price. Inflation is usually measured by a broad-based
price index, such as the implicit deflator for Gross Domestic
Product or the Consumer Price Index.
Internal Rate of Return —- The discount rate that sets the net
present value of the stream of net benefits equal to zero. The
internal rate of return may have multiple values when the stream
of net benefits alternates from negative to positive more than
once.
Life Cycle Cost —— The overall estimated cost for a particular
program alternative over the time period corresponding to the
life of the program including direct and indirect initial costs
plus any periodic or continuing costs of operation and
maintenance.
Multiøljer -- The ratio between the direct effect output or
employment and the full effect,. including the effects of second
order, rounds or spending. Multiplier effects greater than 1 • 0
require the existence of involuntary unemployment.
Net Present Value -- The difference between the discounted
present value of benefits and the discounted present value of
costs. - -
Nominal Values Economic units measured in terms of purchasing
power of the date in question. A nominal, value reflects the
effects of general price inflation.
Nominal Interest Rat . An interest rate that is not adjusted to
remove the effects of actual or expected inflation. Market
interest rats. ar. generally nominal interest rates.
Oi nortunity Cost -- The maximum worth of a good or input among
possible alternativ, uses.
Real or Constant Dollar Values - Economic units measured in
terms of constant purchasing power. A real value is not affected
by general price inflation. Real values can be estimated by
deflating nominal values with a general price index, such as the
implicit deflator for Gross Domestic Product or the Consumer
Price Index.
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Real Interest Rate -- An interest rate that has been adjusted to
remove the effect of expected or actual inflation. Real interest
rates can be approximated by subtracting the expected or actual
inflation rate from a nominal interest rate. (A precise estimate
can be obtained by dividing one plus the nominal interest rate by
one plus the expected or actual inflation rate, and subtracting
one from the resulting quotient.)
Relative Price —— A price ratio between two goods as, for
example, the ratio of the price of energy to the price of
equipment.
Shadow Price -- An estimate of what the price of a good or input
would be in the absence of market distortions, such as exter-
nalities or taxes. For example, the shadow price of capital is
the present value of the social returns to capital (before
corporate income taxes) measured in units of consumption.
Sunk Cost -- A cost incurred in the past that will not be
affected by any present or future decision. Sunk costs should be
ignored in determining whether a new investment is worthwhile.
Transfer Payment —— A payment of money or goods. A pure transfer
is unrelated to the provision of any goods or services in
exchange. Such payments alter the distribution of income, but do
not directly affect the allocation of resources on the margin.
Treasury Rates -— Rates of interest on marketable Treasury debt.
Such debt is issued in maturities ranging from 91 days to 30
years
willinaness to PaY -— The maximum amount an individual would be
willing to give up in order to secure a change in the provision
of a good or service.
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APPENDIX S
ADDITIONA& OtIIDJhNCI tOR DISCOUIITIWQ
1. Sam 1• Format for Diicountima D.f.rr.d Costi and Benef its
Assume a 10-year proqram which will commit the Government to the
stream of real (or constant-dollar) expenditures appearing in
column (2) of the table below and which will result in a series
of real benefits appearing in column (3). The discount factor
for a 7 percent discount rate is shown in column (4). The
present value cost for each of the 10 years is calculated by
multiplying column (2) by column (4); the present value benefit
for each of the 10 years is calculated by multiplying column (3)
by column (4). The present values of costs and benefits are
presented in columns (5) and (6) respectively.
$106.40 $142.41
factor is calculated as 1f(1 + i ) ’ where L is
rate (.07) and t is the year.
The sum of column (5) is the total present value of costs and the
sum of column (6) ii the tot ,], present value of benefits. Net
present value is $36.01, the differ.nce between the sum of
discounted benefits and the sum of discounted costs.
2. End-of—Tsar and Bid-Year Discount Factors
The discount factors presented in the table above are calculated
on the implicit assumption that costs and benefits occur as
lump—sums at year-end. When costs and benefits occur in a steady
Year since
value of
value of
initiation,
Expected
Expected
Discount
costs
benefits
renewal or
yearly
yearly
factors
Col. 2 x
Col. 3 x
ex ans ion
(2) (3)
(5)
Col. 4
(6)
(1)
(4)
1
$10.00
$ 0.00
0.9346
$ 9.35
$ 0.00
2
20.00
0.00
0.8734
17.47
0.00
3
30.00
5.00
0.8163
24.49
4.08
4
30.00
10.00
0.7629
22.89
7.63
5
20.00
30.00
0.7130
14.26
21.39
6
10.00
40.00
0.6663
6.66
26.65
7
5.00
40.00
0.6227
3.11
24.91
8
5.00
40.00
0.5820
2.91
23.28
9
5.00
40.00
0.5439
2.72
21.76
10
5.00
25.00
0.5083
2.54
12.71
Total
li : The discount
the intsrest
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stream, applying mid-year discount factors is more appropriate.
For instance, the first cost in the table may be estimated to
occur after six months, rather than at the end of one year to
approximate better a steady stream of costs and benefits occur-
ring over the first year. Similarly, it may be assumed that all
other costs and benefits are advanced six months to approximate
better a continuing steady flow.
The present values of costs and benefits computed from the table
above can be converted to a mid-year discounting basis by
multiplying them by 1.0344 (the square root of 1.07). Thus, if
the above example were converted to a aid-year basis, the present
value of costs would be $110.06, the present value of benefits
would be $147.31, and the net present value would be $37.25.
3. Illustrative fliscount Pactor. for a Discount Rat, of 7
Year since Beginning-
Initiation, Year-end Mid-year of—year
Renewal or Discount Discount Discount
EXD fl jQfl
1 0.9346 0.9667 1.0000
2 0.8734 0.9035 0.9346
3 0.8163 0.8444 0.8734
4 0.7629 0.7891 0.8163
5 0.7130 0.7375 0.7629
6 0.6663 0.6893 0.7130
7 0.6227 0.6442- 0.6663
B 0.5820 0.6020 0.6227-
9 0.5439 0.5626 0.5820
10 0.5083 0.5258 0.5439
11 0.4751 0.4914 0.5083
12 0.4440 0.4593 0.4751
13 0.4150 0.4292 0.4440
14 0.3878 0.4012 0.4150
15 0.3624 0.3749 0.3878
16 0.3387 0.3504 0.3624
17 0.3166 0.3275 0.3387
18 0.2959 0.3060 0.3166
19 0.2765 0.2860 0.2959
20 0.2584 0.2673 0.2765
21 0.2415 0.2498 0.2584
22 0.2257 0.2335 0.2415
23 0.2109 0.2182 0.2257
24 0.1971 0.2039 0.2109
25 0.1842 0.1906 0.1971
26 0.1722 0.1781 0.1842
27 0.1609 0.1665 0.1722
28 0.1504 0.1556 0.1609
29 0.1406 0.1454 0.1504
30 0.1314 0.1359 0.1406
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APPEIIDIX C
DISCOUNT RATES FOR COaT-EFFECTIVENESS, LEASE PURCIA8E,
AND RELATED ANALYSES
lffpotiv. Dates . This appendix is updated annually at the time
of the President’s budget submission to Congress. This version
of the appendix is valid only through February, 1993. Updates of
this appendix will be available upon request from the Office of
- Economic Policy in 0MB (202-395-3381). Copies of the appendix
and the Circular may also be obtained from the 0MB Publications
Office (202—395—7332).
Nominal Discount Rates . Nominal interest rates based on the
economic assumptions from the Fiscal Tear 1993 Budget are
presented in the table below. These nominal rates are to be used
for discounting nominal flows, as in lease—purchase analysis.
/
Nominal Xnter•st Rat.. on Tr.asurv Notes and Bonds
of Sn.cifid Maturities (in orcent)
5-Year 10-Year 1Q X
6.1 6.5 6.7 7.0 7.1
Analyses of programs with terms different from those presented
above may use a linear interpolation. For example, a four—year
pr3ject can be evaluated with a 6.3 percent nominal rate. Pro-
grams with durations longer than 30 years may use the 30-year
interest rate.
Real Discount Rat.. . Real interest rates based on the economic
assumptions from the Fiscal Year 1993 Budget are presented below.
These real rates are to be used for discounting real (constant-
dollar) flow., as in cost-effectiveness analysis.
Real Int.reat Rates on Treasury Notes and Bonds
of Im.cifid Maturities (in n.rc.nt)
3-Year 5-Year 7-Year
2.7 3.1 3.3 3.6 3.8
Analyses of programs with term. different from those presented
above may use a linear interpolation. For example, a four—year
project can be evaluated with a 2.9 percent real rate. Programs
with durations longer than 30 years may use the 30—year interest
rate.
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EXECUTIVE OFFICE OF THE PRESIDENT
rilE DIRECTOR
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON. 0 C. O3
October 29, 1992
CIRCULAR NO. A-94
Revised
Transmittal Memorandum No. 64
TO THE HEADS OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS
SUBJECT:
Guidelines and Discount Rates for Benefit-Cost Analysis
of Federal Programs
Circular A—94 provides guidance on benefit—cost, cost—
effectiveness, and lease—purchase analysis to be used by agencies
in evaluating Federal activities. It includes updated guidance
on the discount rates to be used in evaluating activities whose
benefits and costs are distributed over time. It also contains
expanded guidance on the measurement of benefits and costs,
treatment of uncertainty, and related issues. This guidance must
be followed in all analyses submitted to 0MB in support of
legislative and budget programs.
This Circular replaces and rescinds
“Discount Rates to be Used in Evaluating
and Benefits,” dated March 27, 1972. It
No. A—104, “Evaluating Leases of Capital
1986, which was rescinded previously.
0MB Circular No. A-94,
Time—Distributed Costs
also replaces Circular
Assets,” dated June 1,
Richard Darman
Director
Attachment
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Circular A-94 and that if 0MB revised Circular A-94, then EPA
would address the matter in program guidance to ensure
consistency with Circular A-94. Therefore, the Office of
Emergency and Remedial Response (OERR) is revising the Guidance
for Conducting Remedial Investigations and Feasibility Studies
(1988) to reflect the use of the 7% discount rate instead of the
5% discount rate published in the 1988 guidance.
OBJECTIVE
OERR recommends that the 7% discount rate be adopted for the
present worth calculations to determine the cost—effectiveness of
potential remedies in the RI/FS to be consistent with the 0MB
directive and other federal agencies.
IMPLEMENTATION
The 7% discount rate will apply to sites which have a
Record of Decision (ROD) targeted for FY 94 and thereafter.
Fiscal year 1993 is to be considered a transition year —— where
the cost—effectiveness analysis is underway and the discount rate
can be changed or for those cost—effectiveness analyses that have
not yet been initiated, the 7% rate should be used. If a ROD is
ready to be signed, then the cost—effectiveness analysis does not
have to be revised.
The revised 0MB Circular A-94 is enclosed for your
reference. If you have any questions concerning the circular or
the discount rate, please call Sherri Gill of the Remedial
Operations Guidance Branch at (703) 603—9043.
enclosure
cc: Bruce Diamond
Sally Mansbach
David Bennett
Superfund Regional Branch Chiefs
Superfund Regional Section Chiefs
Superfund Document Center
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