Faculty of Economic and Management Sciences
School of Financial Sciences
Department of Financial Management
Selected Highlights from Research Findings
The Department of Financial Management, in collaboration with two external economists, Mr Christo Luus and Dr Dawie Mullins, conducted a study to evaluate the appropriateness of discount rates used by the Development Bank of Southern Africa (DBSA) for the purpose of cost-benefit analysis when evaluating projects. The aim of cost-benefit analysis is to determine whether a project is desirable from a social welfare perspective by means of the use of the time discounted economic costs and benefits of a project. A critical assumption of cost-benefit analysts is the discount rate – usually referred to as the social discount rate – because economic benefits and costs derived from a project are seen to have a more direct bearing on society and consumers compared to owners of capital who normally use a financial discount rate (hurdle rate). The findings showed that estimates for the social discount rate in South Africa, based on theoretical formulations and international empirical review, vary between 8.4% and 9.6%. The current rate of 8% that is used by the DBSA should therefore be adjusted upwards, indicating that the current present value of discounted future values is too low. It is therefore implied that the discounted monetary value of benefits should actually be inflated, which will affect increased levels of approval for investment lending
Contact person: Prof EJ Oost.
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