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Selection of interest and inflation rates for infrastructure investment analyses.
  • Published Date:
    2014-12-01
  • Language:
    English
Filetype[PDF-1.53 MB]


Details:
  • Report Number:
    MPC 14-275
  • Resource Type:
  • Geographical Coverage:
  • Corporate Publisher:
  • Format:
  • Description:
    The South Dakota Department of Transportation (SDDOT) uses engineering economic analyses (EEA) to

    support planning, design, and construction decision-making such as project programming and planning,

    pavement type selection, and the occasional valuing of roads transferred from the state highway system to

    counties and cities. Interest, inflation, and discount rates are three critical factors that significantly affect

    the outcome of an economic analysis.

    The selection and use of appropriate interest and inflation rates for various SDDOT applications are of

    primary concern. The inflation rate currently used by SDDOT is calculated from the South Dakota

    Construction Composite Index (SDCCI). This general rate can neither differentiate between regional

    changes to highway construction costs nor show variation among the individual material inflation rates

    used to create the CCI. In addition, SDDOT generally assumes a zero interest rate which approximately

    equates the real discount rate to the inflation rate. The validity of this assumption needs to be verified.

    Establishing and maintaining sound and equitable rates of interest, inflation, and discount is extremely

    important to SDDOT. Using inappropriate values for interest and inflation rates could unfairly favor

    certain industries and regions, jeopardize economic analyses, and weaken the credibility of SDDOT

    investment decisions. This study is intended to determine whether appropriate rates are being used in

    various applications and to establish a means of obtaining appropriate rates that can help validate,

    support, and enhance SDDOT’s transportation investment decisions.

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