Selection of interest and inflation rates for infrastructure investment analyses.
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2014-12-01
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Abstract: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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