Sensitivity analysis also examined project's responses to varying discount rates.
2. Once constructed, the station will begin immediate delivery of electricity, and will continue to do so (at a constant rate) over a period of 45 years from its first operation. Its operational life is 45 years.
A Cost Benefit Analysis (CBA) of the above project has to be done given the assumptions and cost/revenue details. An appropriate discount rate is essential for conducting a CBA.In the following paragraphs we would detail the reasons for choosing a particular discount rate. Thereafter sensitivity analysis would be conducted varying critical parameters of the CBA to conclude if such variations do affect accept/reject decisions materially. It would be followed by an appraisal report covering the CBA and the sensitivity analysis.
The discount rate is the rate by which benefits/costs accruing in future project running period may be adjusted so that a comparison with present values is made possible. Conceptually this rate should be rate which is the equilibrium rate in demand and supply of savings in the present time. In order to save investors compare the value of current consumption to its future value and seek a rate of compensation required to curtail present consumption. An appropriate discount rate choice becomes important as funds are required