Social Rate of discount

Social Discount Rate is a measure used to help guide choices about the value of diverting funds to social projects. It is defined as “the appropriate value of r to use in computing present discount value for social investments” A social discount rate is sometimes denoted as SDR. Determining this rate is not always easy and can be the subject of discrepancies in the true net benefit to certain projects, plans and policies.

The concept of social discount rate (SDR) refers to the rate used for convertingfuture flows of costs and benefits from an investment project into the sameunits as current values (present values) from a social perspective. This rate isgenerally applied to public sector investment projects. In a without uncertaintyworld, when projects are independent and there are no externalities, using agiven SDR, the net present value of benefit of each project can be calculatedand the projects can be ranked on the basis of their net present values. Thedecision problem becomes choice of a project which yields the highest netpresent value of benefit.In a discrete model, if i is the discount (interest) rate, the discount factor forperiod t is (1+ i)-t. When i is positive, the present value of one rupee of benefitor cost accruing at a future time t will decrease as t increases. When i= 0.02,the present value of one rupee available at t=10 (at the end of ten years) is Re0.82 and the present value of one rupee available at t= 100 is less than Re 0.14.When i=0.15, the present value of one rupee at t=10 is less than Re 0.25 andthe present value of one rupee available at t =100 is Re 0.00000085.

 Sources

 1) Wiki pedia

2) coe.mse.ac.in/dp/Paper

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