What is the purpose of the discount rate in benefit-cost analysis?

• A. To calculate present values for a long-term program
• B. To adjust for time value of money
• C. To quantify risk
• D. To account for inflation only

Answer: (B)

Time value of money. A dollar today is worth more than a dollar in the future because it can be invested to earn returns, used now, or consumed. The discount rate expresses how much value we assign to having money later, effectively converting future costs and benefits into present-day terms. By applying this rate, future values are brought back to present value so we can compare costs and benefits that occur at different times on a common basis. That core idea—adjusting for the fact that future money is worth less in present terms—drives benefit-cost analysis. The rate can also reflect inflation (if using real versus nominal values) or risk, but those are aspects of how the rate is chosen, not the fundamental purpose. Therefore, the primary purpose is to adjust for the time value of money.