Home • The Administration • Office of Management and Budget

ABOUT

Leadership

OMB Organization Chart

Open Government Plan

RSS Feeds

Intellectual Property

Agency Info

Bulletins

Circulars

Budget

State and Local 

Governments

Educational and NonProfit Institutions

Federal Procurement

Federal Financial 

Management

Federal Information 

Resources / Data 

Collection

Other Special Purpose

Memoranda

Privacy Guidance

Reports

Federal Register

FOIA

NDA

No FEAR

OMB Locator

Circular No. A-94 Revised 

(Transmittal Memo No. 64)

October 29, 1992

MEMORANDUM FOR HEADS OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS

SUBJECT: Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs

Table of Contents

1. Purpose

2. Rescission

3. Authority

4. Scope

5. General Principles

a. Net Present Value and Related Outcome Measures

b. Cost-Effectiveness Analysis

c. Elements of Benefit-Cost or Cost-Effectiveness Analysis

6. Identifying and Measuring Benefits and Costs

a. Identifying Benefits and Costs

b. Measuring Benefits and Costs

7. Treatment of Inflation

a. Real or Nominal Values

b. Recommended Inflation Assumption

8. Discount Rate Policy

a. Real versus Nominal Discount Rates

b. Public Investment and Regulatory Analyses

About OMBlog The Budget Management Regulation & Information Policy Legislative Information

Page 1 of 17

http://www.whitehouse.gov/omb/circulars_a094 12/11/2013
c. Cost-Effectiveness, Lease-Purchase,Internal Government Investment, and Asset Sale Analyses

9. Treatment of Uncertainty

a. Characterizing Uncertainty

b. Expected Values

c. Sensitivity Analysis

d. Other Adjustments for Uncertainty

10. Incidence and Distributional Effects

a. Alternative Classifications

b. Economic Incidence

11. Special Guidance for Public Investment Analysis

a. Analysis of Excess Burdens

b. Exceptions

12. Special Guidance for Regulatory Impact Analysis

13. Special Guidance for Lease-Purchase Analysis

a. Coverage

b. Required Justification for Leases

c. Analytical Requirements and Definitions

14. Related Guidance

15. Implementation

16. Effective Date

17. Interpretation

Appendix A: Definitions of Terms

Appendix B: Additional Guidance for Discounting

Appendix C: Discount Rates for Cost-Effectiveness, Lease-Purchase, and Related Analyses

Other Documents

1. Purpose. The goal of this Circular is to promote efficient resource allocation through well-informed decision-making 

by the Federal Government. It provides general guidance for conducting benefit-cost and cost-effectiveness analyses. 

It also provides specific guidance on the discount rates to be used in evaluating Federal programs whose benefits and 

costs are distributed over time. The general guidance will serve as a checklist of whether an agency has considered 

and properly dealt with all the elements for sound benefit-cost and cost-effectiveness analyses.

2. Rescission. This Circular replaces and rescinds Office of Management and Budget (OMB) Circular No. A-94, 

"Discount Rates to Be Used in Evaluating Time-Distributed Costs and Benefits," dated March 27, 1972, and Circular 

No. A-104, "Evaluating Leases of Capital Assets," dated June 1, 1986, which has been rescinded. Lease-purchase 

analysis is only appropriate after a decision has been made to acquire the services of an asset. Guidance for leasepurchase analysis is provided in Section 8.c.(2) and Section 13.

3. Authority. This Circular is issued under the authority of 31 U.S.C. Section 1111 and the Budget and Accounting Act 

of 1921, as amended.

Page 2 of 17

http://www.whitehouse.gov/omb/circulars_a094 12/11/2013
4. Scope. This Circular does not supersede agency practices which are prescribed by or pursuant to law, Executive 

Order, or other relevant circulars. The Circular's guidelines are suggested for use in the internal planning of Executive 

Branch agencies. The guidelines must be followed in all analyses submitted to OMB in support of legislative and 

budget-programs in compliance with OMB Circulars No. A-11, "Preparation and Submission of Annual Budget 

Estimates," and No. A-19, "Legislative Coordination and Clearance." These guidelines must also be followed in 

providing estimates submitted to OMB in compliance with Executive Order No. 12291, "Federal Regulation," and the 

President's April 29, 1992 memorandum requiring benefit-cost analysis for certain legislative proposals. 

a. Aside from the exceptions listed below, the guidelines in this Circular apply to any analysis used to support 

Government decisions to initiate, renew, or expand programs or projects which would result in a series of measurable 

benefits or costs extending for three or more years into the future. The Circular applies specifically to:

1. Benefit-cost or cost-effectiveness analysis of Federal programs or policies. 

2. Regulatory impact analysis. 

3. Analysis of decisions whether to lease or purchase. 

4. Asset valuation and sale analysis.

b. Specifically exempted from the scope of this Circular are decisions concerning:

Water resource projects (guidance for which is the approved Economic and Environmental Principles and 

Guidelines for Water and Related Land Resources Implementation Studies). 

1.

The acquisition of commercial-type services by Government or contractor operation (guidance for which is OMB 

Circular No. A-76). 

2.

Federal energy management programs (guidance for which can be found in the Federal Register of January 25, 

1990, and November 20, 1990).

3.

c. This Circular applies to all agencies of the Executive Branch of the Federal Government. It does not apply to the 

Government of the District of Columbia or to non-Federal recipients of loans, contracts or grants. Recipients are 

encouraged, however, to follow the guidelines provided here when preparing analyses in support of Federal activities.

d. For small projects which share similar characteristics, agencies are encouraged to conduct generic studies and to 

avoid duplication of effort in carrying out economic analysis.

5. General Principles. Benefit-cost analysis is recommended as the technique to use in a formal economic analysis of 

government programs or projects. Cost-effectiveness analysis is a less comprehensive technique, but it can be 

appropriate when the benefits from competing alternatives are the same or where a policydecision has been made that 

the benefits must be provided. (Appendix A provides a glossary of technical terms used in this Circular; technical terms 

are italicized when they first appear.) 

a. Net Present Value and Related Outcome Measures. The standard criterion for deciding whether a government 

program can be justified on economic principles is net present value -- the discounted monetized value of expected net 

benefits (i.e., benefits minus costs). Net present value is computed by assigning monetary values to benefits and 

costs, discounting future benefits and costs using an appropriate discount rate, and subtracting the sum total of 

discounted costs from the sum total of discounted benefits. Discounting benefits and costs transforms gains and 

losses occurring in different time periods to a common unit of measurement. Programs with positive net present value 

increase social resources and are generally preferred. Programs with negative net present value should generally be 

avoided. (Section 8 considers discounting issues in more detail.)

Page 3 of 17

http://www.whitehouse.gov/omb/circulars_a094 12/11/2013
Although net present value is not always computable (and it does not usually reflect effects on income distribution), 

efforts to measure it can produce useful insights even when the monetary values of some benefits or costs cannot be 

determined. In these cases:

A comprehensive enumeration of the different types of benefits and costs, monetized or not, can be helpful in 

identifying the full range of program effects. 

1.

Quantifying benefits and costs is worthwhile, even when it is not feasible to assign monetary values; physical

measurements may be possible and useful.

2.

Other summary effectiveness measures can provide useful supplementary information to net present value, and 

analysts are encouraged to report them also. Examples include the number of injuries prevented per dollar of cost 

(both measured in present value terms) or a project's internal rate of return.

b. Cost-Effectiveness Analysis. A program is cost-effective if, on the basis of life cycle cost analysis of competing 

alternatives, it is determined to have the lowest costs expressed in present value terms for a given amount of benefits. 

Costeffectiveness analysis is appropriate whenever it is unnecessary or impractical to consider the dollar value of the 

benefits provided by the alternatives under consideration. This is the case whenever (i) each alternative has the same 

annual benefits expressed in monetary terms; or (ii) each alternative has the same annual affects, but dollar values 

cannot be assigned to their benefits. Analysis of alternative defense systems often falls in this category.

Cost-effectiveness analysis can also be used to compare programs with identical costs but differing benefits. In this 

case, the decision criterion is the discounted present value of benefits. The alternative program with the largest 

benefits would normally be favored.

c. Elements of Benefit-Cost or Cost-Effectiveness Analysis.

Policy Rationale. The rationale for the Government program being examined should be clearly stated in the 

analysis. Programs may be justified on efficiency grounds where they address market failure, such as public goods 

and externalities. They may also be justified where they improve the efficiency of the Government's internal 

operations, such as cost-saving investments. 

1.

Explicit Assumptions. Analyses should be explicit about the underlying assumptions used to arrive at estimates 

of future benefits and costs. In the case of public health programs, for example, it may be necessary to make 

assumptions about the number of future beneficiaries, the intensity of service, and the rate of increase in medical 

prices. The analysis should include a statement of the assumptions, the rationale behind them, and a review of 

their strengths and weaknesses. Key data and results, such as year-by-year estimates of benefits and costs, 

should be reported to promote independent analysis and review. 

2.

Evaluation of Alternatives. Analyses should also consider alternative means of achieving program objectives by 

examining different program scales, different methods of provision, and different degrees of government 

involvement. For example, in evaluating a decision to acquire a capital asset, the analysis should generally 

consider: (i) doing nothing; (ii) direct purchase; (iii) upgrading, renovating, sharing, or converting existing 

government property; or (iv) leasing or contracting for services. 

3.

Verification. Retrospective studies to determine whether anticipated benefits and costs have been realized are 

potentially valuable. Such studies can be used to determine necessary corrections in existing programs, and to 

improve future estimates of benefits and costs in these programs or related ones. Agencies should have a plan for 

4.

Page 4 of 17

http://www.whitehouse.gov/omb/circulars_a094 12/11/2013
periodic, results-oriented evaluation of program effectiveness. They should also discuss the results of relevant 

evaluation studies when proposing reauthorizations or increased program funding.

6. Identifying and Measuring Benefits and Costs. Analyses should include comprehensive estimates of the 

expected benefits and costs to society based on established definitions and practices for program and policy 

evaluation. Social net benefits, and not the benefits and costs to the Federal Government, should be the basis for 

evaluating government programs or policies that have effects on private citizens or other levels of government. Social 

benefits and costs can differ from private benefits and costs as measured in the marketplace because of imperfections 

arising from: (i) external economies or diseconomies where actions by one party impose benefits or costs on other 

groups that are not compensated in the market place; (ii) monopoly power that distorts the relationship between 

marginal costs and market prices; and (iii) taxes or subsidies. 

a. Identifying Benefits and Costs. Both intangible and tangible benefits and costs should be recognized. The 

relevant cost concept is broader than private-sector production and compliance costs or government cash 

expenditures. Costs should reflect the opportunity cost of any resources used, measured by the return to those 

resources in their most productive application elsewhere. Below are some guidelines to consider when identifying 

benefits and costs.

Incremental Benefits and Costs. Calculation of net present value should be based on incremental benefits 

and costs. Sunk costs and realized benefits should be ignored. Past experience is relevant only in helping to 

estimate what the value of future benefits and costs might be. Analyses should take particular care to identify 

the extent to which a policy such as a subsidy program promotes substitutes for activities of a similar nature that 

would occur without the policy. Either displaced activities should be explicitly recorded as costs or only 

incremental gains should be recorded as benefits of the policy. 

•

Interactive Effects. Possible interactions between the benefits and costs being analyzed and other government 

activities should be considered. For example, policies affecting agricultural output should reflect real economic 

values, as opposed to subsidized prices. 

•

International Effects. Analyses should focus on benefits and costs accruing to the citizens of the United States 

in determining net present value. Where programs or projects have effects outside the United States, these 

effects should be reported separately. 

•

Transfers. There are no economic gains from a pure transfer payment because the benefits to those who 

receive such a transfer are matched by the costs borne by those who pay for it. Therefore, transfers should be 

excluded from the calculation of net present value. Transfers that arise as a result of the program or project 

being analyzed should be identified as such, however, and their distributional effects discussed. It should also 

be recognized that a transfer program may have benefits that are less than the program's real economic costs 

due to inefficiencies that can arise in the program's delivery of benefits and financing.

•

b. Measuring Benefits and Costs. The principle of willingness-to-pay provides an aggregate measure of what 

individuals are willing to forego to obtain a given benefit. Market prices provide an invaluable starting point for 

measuring willingness-to-pay, but prices sometimes do not adequately reflect the true value of a good to society. 

Externalities, monopoly power, and taxes or subsidies can distort market prices.

Taxes, for example, usually create an excess burden that represents a net loss to society. (The appropriate method for 

recognizing this excess burden in public investment analyses is discussed in Section 11.) In other cases, market 

prices do not exist for a relevant benefit or cost. When market prices are distorted or unavailable, other methods of 

valuing benefits may have to be employed. Measures derived from actual market behavior are preferred when they are 

available.

Page 5 of 17

http://www.whitehouse.gov/omb/circulars_a094 12/11/2013
Inframarginal Benefits and Costs. Consumers would generally be willing to pay more than the market price 

rather than go entirely without a good they consume. The economist's concept of consumer surplus measures the 

extra value consumers derive from their consumption compared with the value measured at market prices. When it 

can be determined, consumer surplus provides the best measure of the total benefit to society from a government 

program or project. Consumer surplus can sometimes be calculated by using econometric methods to estimate 

consumer demand. 

1.

Indirect Measures of Benefits and Costs. Willingness-to-pay can sometimes be estimated indirectly through 

changes in land values, variations in wage rates, or other methods. Such methods are most reliable when they are 

based on actual market transactions. Measures should be consistent with basic economic principles and should be 

replicable. 

2.

Multiplier Effects. Generally, analyses should treat resources as if they were likely to be fully employed. 

Employment or output multipliers that purport to measure the secondary effects of government expenditures on 

employment and output should not be included in measured social benefits or costs.

3.

7. Treatment of Inflation. Future inflation is highly uncertain. Analysts should avoid having to make an assumption 

about the general rate of inflation whenever possible. 

a. Real or Nominal Values. Economic analyses are often most readily accomplished using real or constant-dollar

values, i.e., by measuring benefits and costs in units of stable purchasing power. (Such estimates may reflect 

expected future changes in relative prices, however, where there is a reasonable basis for estimating such changes.) 

Where future benefits and costs are given in nominal terms, i.e., in terms of the future purchasing power of the dollar, 

the analysis should use these values rather than convert them to constant dollars as, for example, in the case of leasepurchase analysis.

Nominal and real values must not be combined in the same analysis. Logical consistency requires that analysis be 

conducted either in constant dollars or in terms of nominal values. This may require converting some nominal values to 

real values, or vice versa.

b. Recommended Inflation Assumption. When a general inflation assumption is needed, the rate of increase in the 

Gross Domestic Product deflator from the Administration's economic assumptions for the period of the analysis is 

recommended. For projects or programs that extend beyond the six-year budget horizon, the inflation assumption can 

be extended by using the inflation rate for the sixth year of the budget forecast. The Administration's economic forecast 

is updated twice annually, at the time the budget is published in January or February and at the time of the MidSession Review of the Budget in July. Alternative inflation estimates, based on credible private sector forecasts, may 

be used for sensitivity analysis.

8. Discount Rate Policy. In order to compute net present value, it is necessary to discount future benefits and costs. 

This discounting reflects the time value of money. Benefits and costs are worth more if they are experienced sooner. 

All future benefits and costs, including nonmonetized benefits and costs, should be discounted. The higher the 

discount rate, the lower is the present value of future cash flows. For typical investments, with costs concentrated in 

early periods and benefits following in later periods, raising the discount rate tends to reduce the net present value. 

(Technical guidance on discounting and a table of discount factors are provided in Appendix B.) 

a. Real versus Nominal Discount Rates. The proper discount rate to use depends on whether the benefits and costs 

are measured in real or nominal terms.

A real discount rate that has been adjusted to eliminate the effect of expected inflation should be used to discount 

constant-dollar or real benefits and costs. A real discount rate can be approximated by subtracting expected 

1.

Page 6 of 17

http://www.whitehouse.gov/omb/circulars_a094 12/11/2013
inflation from a nominal interest rate. 

A nominal discount rate that reflects expected inflation should be used to discount nominal benefits and costs. 

Market interest rates are nominal interest rates in this sense.

2.

b. Public Investment and Regulatory Analyses. The guidance in this section applies to benefit-cost analyses of 

public investments and regulatory programs that provide benefits and costs to the general public. Guidance related to 

cost-effectiveness analysis of internal planning decisions of the Federal Government is provided in Section 8.c.

In general, public investments and regulations displace both private investment and consumption. To account for this 

displacement and to promote efficient investment and regulatory policies, the following guidance should be observed.

Base-Case Analysis. Constant-dollar benefit-cost analyses of proposed investments and regulations should report 

net present value and other outcomes determined using a real discount rate of 7 percent. This rate approximates 

the marginal pretax rate of return on an average investment in the private sector in recent years. Significant 

changes in this rate will be reflected in future updates of this Circular. 

1.

Other Discount Rates. Analyses should show the sensitivity of the discounted net present value and other 

outcomes to variations in the discount rate. The importance of these alternative calculations will depend on the 

specific economic characteristics of the program under analysis. For example, in analyzing a regulatory proposal 

whose main cost is to reduce business investment, net present value should also be calculated using a higher 

discount rate than 7 percent. 

2.

Analyses may include among the reported outcomes the internal rate of return implied by the stream of benefits 

and costs. The internal rate of return is the discount rate that sets the net present value of the program or project to 

zero. While the internal rate of return does not generally provide an acceptable decision criterion, it does provide 

useful information, particularly when budgets are constrained or there is uncertainty about the appropriate discount 

rate.

Using the shadow price of capital to value benefits and costs is the analytically preferred means of capturing the 

effects of government projects on resource allocation in the private sector. To use this method accurately, the 

analyst must be able to compute how the benefits and costs of a program or project affect the allocation of private 

consumption and investment. OMB concurrence is required if this method is used in place of the base case 

discount rate.

3.

c. Cost-Effectiveness, Lease-Purchase, Internal Government Investment, and Asset Sales Analyses. The 

Treasury's borrowing rates should be used as discount rates in the following cases:

Cost-Effectiveness Analysis. Analyses that involve constant-dollar costs should use the real Treasury borrowing 

rate on marketable securities of comparable maturity to the period of analysis. This rate is computed using the 

Administration's economic assumptions for the budget, which are published in January of each year. A table of 

discount rates based on the expected interest rates for the first year of the budget forecast is presented in 

Appendix C of this Circular. Appendix C is updated annually and is available upon request from OMB. Real 

Treasury rates are obtained by removing expected inflation over the period of analysis from nominal Treasury 

interest rates. (Analyses that involve nominal costs should use nominal Treasury rates for discounting, as 

described in the following paragraph.) 

1.

Lease-Purchase Analysis. Analyses of nominal lease payments should use the nominal Treasury borrowing rate 

on marketable securities of comparable maturity to the period of analysis. Nominal Treasury borrowing rates should 

be taken from the economic assumptions for the budget. A table of discount rates based on these assumptions is 

presented in Appendix C of this Circular, which is updated annually. (Constant dollar lease-purchase analyses 

2.

Page 7 of 17

http://www.whitehouse.gov/omb/circulars_a094 12/11/2013
should use the real Treasury borrowing rate, described in the preceding paragraph.) 

Internal Government Investments. Some Federal investments provide "internal" benefits which take the form of 

increased Federal revenues or decreased Federal costs. An example would be an investment in an energy-efficient 

building system that reduces Federal operating costs. Unlike the case of a Federally funded highway (which 

provides "external" benefits to society as a whole), it is appropriate to calculate such a project's net present value 

using a comparable-maturity Treasury rate as a discount rate. The rate used may be either nominal or real, 

depending on how benefits and costs are measured. 

3.

Some Federal activities provide a mix of both Federal cost savings and external social benefits. For example, 

Federal investments in information technology can produce Federal savings in the form of lower administrative 

costs and external social benefits in the form of faster claims processing. The net present value of such 

investments should be evaluated with the 7 percent real discount rate discussed in Section 8.b. unless the analysis 

is able to allocate the investment's costs between provision of Federal cost savings and external social benefits. 

Where such an allocation is possible, Federal cost savings and their associated investment costs may be 

discounted at the Treasury rate, while the external social benefits and their associated investment costs should be 

discounted at the 7 percent real rate.

4. Asset Sale Analysis. Analysis of possible asset sales should reflect the following: 

(a) The net present value to the Federal Government of holding an asset is best measured by discounting its future 

earnings stream using a Treasury rate. The rate used may be either nominal or real, depending on how earnings 

are measured.

(b) Analyses of government asset values should explicitly deduct the cost of expected defaults or delays in 

payment from projected cash flows, along with government administrative costs. Such analyses should also 

consider explicitly the probabilities of events that would cause the asset to become nonfunctional, impaired or 

obsolete, as well as probabilities of events that would increase asset value.

(c) Analyses of possible asset sales should assess the gain in social efficiency that can result when a government 

asset is subject to market discipline and private incentives. Even though a government asset may be used more 

efficiently in the private sector, potential private-sector purchasers will generally discount such an asset's earnings 

at a rate in excess of the Treasury rate, in part, due to the cost of bearing risk. When there is evidence that 

government assets can be used more efficiently in the private sector, valuation analyses for these assets should 

include sensitivity comparisons that discount the returns from such assets with the rate of interest earned by assets 

of similar riskiness in the private sector.

9. Treatment of Uncertainty. Estimates of benefits and costs are typically uncertain because of imprecision in both 

underlying data and modeling assumptions. Because such uncertainty is basic to many analyses, its effects should be 

analyzed and reported. Useful information in such a report would include the key sources of uncertainty; expected 

value estimates of outcomes; the sensitivity of results to important sources of uncertainty; and where possible, the 

probability distributions of benefits, costs, and net benefits. 

a. Characterizing Uncertainty. Analyses should attempt to characterize the sources and nature of uncertainty. 

Ideally, probability distributions of potential benefits, costs, and net benefits should be presented. It should be 

recognized that many phenomena that are treated as deterministic or certain are, in fact, uncertain. In analyzing 

uncertain data, objective estimates of probabilities should be used whenever possible. Market data, such as private 

insurance payments or interest rate differentials, may be useful in identifying and estimating relevant risks. Stochastic 

simulation methods can be useful for analyzing such phenomena and developing insights into the relevant probability 

distributions. In any case, the basis for the probability distribution assumptions should be reported. Any limitations of 

the analysis because of uncertainty or biases surrounding data or assumptions should be discussed.

Page 8 of 17

http://www.whitehouse.gov/omb/circulars_a094 12/11/2013
b. Expected Values. The expected values of the distributions of benefits, costs and net benefits can be obtained by 

weighting each outcome by its probability of occurrence, and then summing across all potential outcomes. If estimated 

benefits, costs and net benefits are characterized by point estimates rather than as probability distributions, the 

expected value (an unbiased estimate) is the appropriate estimate for use.

Estimates that differ from expected values (such as worst-case estimates) may be provided in addition to expected 

values, but the rationale for such estimates must be clearly presented. For any such estimate, the analysis should 

identify the nature and magnitude of any bias. For example, studies of past activities have documented tendencies for 

cost growth beyond initial expectations; analyses should consider whether past experience suggests that initial 

estimates of benefits or costs are optimistic.

c. Sensitivity Analysis. Major assumptions should be varied and net present value and other outcomes recomputed 

to determine how sensitive outcomes are to changes in the assumptions. The assumptions that deserve the most 

attention will depend on the dominant benefit and cost elements and the areas of greatest uncertainty of the program 

being analyzed. For example, in analyzing a retirement program, one would consider changes in the number of 

beneficiaries, future wage growth, inflation, and the discount rate. In general, sensitivity analysis should be considered 

for estimates of: (i) benefits and costs; (ii) the discount rate; (iii) the general inflation rate; and (iv) distributional 

assumptions. Models used in the analysis should be well documented and, where possible, available to facilitate 

independent review.

d. Other Adjustments for Uncertainty. The absolute variability of a risky outcome can be much less significant than 

its correlation with other significant determinants of social welfare, such as real national income. In general, variations 

in the discount rate are not the appropriate method of adjusting net present value for the special risks of particular 

projects. In some cases, it may be possible to estimate certainty-equivalents which involve adjusting uncertain 

expected values to account for risk.

10. Incidence and Distributional Effects. The principle of maximizing net present value of benefits is based on the 

premise that gainers could fully compensate the losers and still be better off. The presence or absence of such 

compensation should be indicated in the analysis. When benefits and costs have significant distributional effects, 

these effects should be analyzed and discussed, along with the analysis of net present value. (This will not usually be 

the case for cost-effectiveness analysis where the scope of government activity is not changing.) 

a. Alternative Classification. Distributional effects may be analyzed by grouping individuals or households according 

to income class (e.g., income quintiles), geographical region, or demographic group (e.g., age). Other classifications, 

such as by industry or occupation, may be appropriate in some circumstances.

Analysis should aim at identifying the relevant gainers and losers from policy decisions. Effects on the preexisting 

assignment of property rights by the program under analysis should be reported. Where a policy is intended to benefit 

a specified subgroup of the population, such as the poor, the analysis should consider how effective the policy is in 

reaching its targeted group.

b. Economic Incidence. Individuals or households are the ultimate recipients of income; business enterprises are 

merely intermediaries. Analyses of distribution should identify economic incidence, or how costs and benefits are 

ultimately borne by households or individuals.

Determining economic incidence can be difficult because benefits and costs are often redistributed in unintended and 

unexpected ways. For example, a subsidy for the production of a commodity will usually raise the incomes of the 

commodity's suppliers, but it can also benefit consumers of the commodity through lower prices and reduce the 

incomes for suppliers of competing products. A subsidy also raises the value of specialized resources used in the 

production of the subsidized commodity. As the subsidy is incorporated in asset values, its distributional effects can 

change.

Page 9 of 17

http://www.whitehouse.gov/omb/circulars_a094 12/11/2013
11. Special Guidance for Public Investment. This guidance applies only to public investments with social benefits 

apart from decreased Federal costs. It is not required for cost-effectiveness or lease-purchase analyses. Because 

taxes generally distort relative prices, they impose a burden in excess of the revenues they raise. Recent studies of 

the U.S. tax system suggest a range of values for the marginal excess burden, of which a reasonable estimate is 25 

cents per dollar of revenue. 

a. Analysis of Excess Burdens. The presentation of results for public investments that are not justified on costsaving grounds should include a supplementary analysis with a 25 percent excess burden. Thus, in such analyses, 

costs in the form of public expenditures should be multiplied by a factor of 1.25 and net present value recomputed.

b. Exceptions. Where specific information clearly suggests that the excess burden is lower (or higher) than 25 

percent, analyses may use a different figure. When a different figure is used, an explanation should be provided for it. 

An example of such an exception is an investment funded by user charges that function like market prices; in this 

case, the excess burden would be zero. Another example would be a project that provides both cost savings to the 

Federal Government and external social benefits. If it is possible to make a quantitative determination of the portion of 

this project's costs that give rise to Federal savings, that portion of the costs may be exempted from multiplication by 

the factor of 1.25.

12. Special Guidance for Regulatory Impact Analysis. Additional guidance for analysis of regulatory policies is 

provided in Regulatory Program of the United States Government which is published annually by OMB. (See 

"Regulatory Impact Analysis Guidance," Appendix V of Regulatory Program of the United States Government for April 

1, 1991 to March 31, 1992.) 

13. Special Guidance for Lease-Purchase Analysis. The special guidance in this section does not apply to the 

decision to acquire the use of an asset. In deciding that, the agency should conduct a benefit-cost analysis, if possible. 

Only after the decision to acquire the services of an asset has been made is there a need to analyze the decision 

whether to lease or purchase. 

a. Coverage. The Circular applies only when both of the following tests of applicability are satisfied:

The lease-purchase analysis concerns a capital asset, (including durable goods, equipment, buildings, facilities, 

installations, or land) which: 

1.

(a) Is leased to the Federal Government for a term of three or more years; or,

(b) Is new, with an economic life of less than three years, and leased to the Federal Government for a term of 75 

percent or more of the economic life of the asset; or,

(c) Is built for the express purpose of being leased to the Federal Government; or,

(d) Is leased to the Federal Government and clearly has no alternative commercial use (e.g., a special-purpose 

government installation).

The lease-purchase analysis concerns a capital asset or a group of related assets whose total fair market value 

exceeds $1 million.

2.

b. Required Justification for Leases. All leases of capital assets must be justified as preferable to direct government 

purchase and ownership. This can be done in one of three ways:

By conducting a separate lease-purchase analysis. This is the only acceptable method for major acquisitions. A 

lease represents a major acquisition if: 

(a) The acquisition represents a separate line-item in the agency's budget; 

1.

(b) The agency or OMB determines the acquisition is a major one; or

Page 10 of 17

http://www.whitehouse.gov/omb/circulars_a094 12/11/2013
(c) The total purchase price of the asset or group of assets to be leased would exceed $500 million.

By conducting periodic lease-purchase analyses of recurrent decisions to lease similar assets used for the same 

general purpose. Such analyses would apply to the entire class of assets. OMB approval should be sought in 

determining the scope of any such generic analysis.

2.

By adopting a formal policy for smaller leases and submitting that policy to the OMB for approval. Following such a 

policy should generally result in the same lease-purchase decisions as would conducting separate lease-purchase 

analyses. Before adopting the policy, it should be demonstrated that: 

3.

(a) The leases in question would generally result in substantial savings to the Government that could not be 

realized on a purchase;

(b) The leases are so small or so short-term as to make separate lease-purchase analysis impractical; and

(c) Leases of different types are scored consistently with the instructions in Appendices B and C of OMB Circular 

No. A-11.

c. Analytical Requirements and Definitions. Whenever a Federal agency needs to acquire the use of a capital 

asset, it should do so in the way that is least expensive for the Government as a whole.

Life-Cycle Cost. Lease-purchase analyses should compare the net discounted present value of the life-cycle cost 

of leasing with the full costs of buying or constructing an identical asset. The full costs of buying include the asset's 

purchase price plus the net discounted present value of any relevant ancillary services connected with the 

purchase. (Guidance on the discount rate to use for lease-purchase analysis is in Section 8.c.) 

1.

Economic Life. For purposes of lease-purchase analysis, the economic life of an asset is its remaining or 

productive lifetime. It begins when the asset is acquired and ends when the asset is retired from service. The 

economic life is frequently not the same as the useful life for tax purposes. 

2.

Purchase Price. The purchase price of the asset for purposes of lease-purchase analysis is its fair market value, 

defined as the price a willing buyer could reasonably expect to pay a willing seller in a competitive market to 

acquire the asset. 

3.

(a) In the case of property that is already owned by the Federal Government or that has been donated or acquired 

by condemnation, an imputed purchase price should be estimated. (Guidance on making imputations is provided in 

Section 13.c.(6).).

(b) If public land is used for the site of the asset, the imputed market value of the land should be added to the 

purchase price.

(c) The asset's estimated residual value, as of the end of the period of analysis, should be subtracted from its 

purchase price. (Guidance on estimating residual value is provided in Section 13.c.(7).)

Taxes. In analyzing the cost of a lease, the normal payment of taxes on the lessor's income from the lease should 

not be subtracted from the lease costs since the normal payment of taxes will also be reflected in the purchase 

cost. The cost to the Treasury of special tax benefits, if any, associated with the lease should be added to the cost 

of the lease. Examples of such tax benefits might include highly accelerated depreciation allowances or tax-free 

4.

Page 11 of 17

http://www.whitehouse.gov/omb/circulars_a094 12/11/2013
financing. 

Ancillary Services. If the terms of the lease include ancillary services provided by the lessor, the present value of 

the cost of obtaining these services separately should be added to the purchase price. Such costs may be 

excluded if they are estimated to be the same for both lease and purchase alternatives or too small to affect the 

comparison. Examples of ancillary services include:

5.

(a) All costs associated with acquiring the property and preparing it for use, including construction,

installation, site, design, and management costs. 

(b) Repair and improvement costs (if included in lease payments).

(c) Operation and maintenance costs (if included in lease payments).

(d) Imputed property taxes (excluding foreign property taxes on overseas acquisitions except where actually paid). 

The imputed taxes approximate the costs of providing municipal services such as water, sewage, and police and 

fire protection. (See Section (6) below.)

(e) Imputed insurance premiums. (See Section (6) below.)

Estimating Imputed Costs. Certain costs associated with the Federal purchase of an asset may not involve a 

direct monetary payment. Some of these imputed costs may be estimated as follows. 

6.

(a) Purchase Price. An imputed purchase price for an asset that is already owned by the Federal Government or 

which has been acquired by donation or condemnation should be based on the fair market value of similar 

properties that have been traded on commercial markets in the same or similar localities. The same method should 

be followed in estimating the imputed value of any Federal land used as a site for the asset.

(b) Property Taxes. Imputed property taxes may be estimated in two ways.

(i) Determine the property tax rate and assessed (taxable) value for comparable property in the intended 

locality. If there is no basis on which to estimate future changes in tax rates or assessed values, the first- year 

tax rate and assessed value (inflation adjusted for each subsequent year) can be applied to all years. Multiply 

the assessed value by the tax rate to determine the annual imputation for property taxes. 

(ii) As an alternative to step (i) above, obtain an estimate of the current local effective property tax rate from the 

Building Owners and Managers Association's Regional Exchange Reports. Multiply the fair market value of the 

government-owned property (inflation adjusted for each year) by the effective tax rate.

(c) Insurance Premiums. Determine local estimates of standard commercial coverage for similar property from the 

Building Owners and Managers Association's Regional Exchange Reports.

Residual Value. A property's residual value is an estimate of the price that the property could be sold for at the end 

of the period of the lease-purchase analysis, measured in discounted present value terms. 

(a) The recommended way to estimate residual value is to determine what similar, comparably aged property is 

currently selling for in commercial markets. 

7.

Page 12 of 17

http://www.whitehouse.gov/omb/circulars_a094 12/11/2013
(b) Alternatively, book estimates of the resale value of used property may be available from industry or government 

sources.

(c) Assessed values of similar, comparably aged properties determined for property tax purposes may also be 

used.

8. Renewal Options. In determining the term of a lease, all renewal options shall be added to the initial lease period.

14. Related Guidance. 

a. OMB Circular No. A-11,"Preparation and Submission of Annual Budget Estimates." 

b. OMB Circular No. A-19,"Legislative Coordination and Clearance." 

c. OMB Circular No. A-70,"Federal Credit Policy." 

d. OMB Circular No. A-76,"Performance of Commercial Activities." 

e. OMB Circular No. A-109,"Policies to Be Followed in the Acquisition of Major Systems." 

f. OMB Circular No. A-130,"Management of Federal Information Resources." 

"Joint OMB and Treasury Guidelines to the Department of Defense Covering Lease or Charter Arrangements for 

Aircraft and Naval Vessels." 

g.

h. Executive Order 12291, "Federal Regulation." 

i. "Regulatory Impact Analysis Guidance," in Regulatory Program of the United States Government. 

j. "Federal Energy Management and Planning Programs; Life Cycle Cost Methodology and Procedures," 

k. Federal Register, Vol. 55, No. 17, January 25, 1990, and Vol. 55, No. 224, November 20, 1990. 

l. Presidential Memorandum of April 29, 1992, "Benefits and Costs of Legislative Proposals."

15. Implementation. Economic analyses submitted to OMB will be reviewed for conformity with Items 5 to 13 in this 

Circular, through the Circular No. A-11 budget justification and submission process, and Circular No. A-19,legislative 

review process. 

16. Effective Date. This Circular is effective immediately. 

17. Interpretation. Questions concerning interpretation of this Circular should be addressed to the Office of Economic 

Policy, Office of Management and Budget (202-395-5873 ) or, in the case of regulatory issues and analysis, to the 

Office of Information and Regulatory Affairs (202-395-4852 ).

APPENDIX A

DEFINITION OF TERMS 

Page 13 of 17

http://www.whitehouse.gov/omb/circulars_a094 12/11/2013
Benefit-Cost Analysis -- A systematic quantitative method of assessing the desirability of government projects or 

policies when it is important to take a long view of future effects and a broad view of possible side-effects. 

 

Capital Asset -- Tangible property, including durable goods, equipment, buildings, installations, and land.

Certainty-Equivalent -- A certain (i.e., nonrandom) outcome that an individual values equally to an uncertain 

outcome. For a risk-averse individual, the certainty-equivalent for an uncertain set of benefits may be less than the 

mathematical expectation of the outcome; for example, an individual may value a 50-50 chance of winning $100 or $0 

as only $45. Analogously, a risk-averse individual may have a certainty-equivalent for an uncertain set of costs that is 

larger in magnitude than the mathematical expectation of costs.

Cost-Effectiveness -- A systematic quantitative method for comparing the costs of alternative means of achieving the 

same stream of benefits or a given objective.

Consumer Surplus -- The maximum sum of money a consumer would be willing to pay to consume a given amount 

of a good, less the amount actually paid. It is represented graphically by the area between the demand curve and the 

price line in a diagram representing the consumer's demand for the good as a function of its price.

Discount Rate -- The interest rate used in calculating the present value of expected yearly benefits and costs.

Discount Factor -- The factor that translates expected benefits or costs in any given future year into present value 

terms. The discount factor is equal to 1/(1 + i)t where i is the interest rate and t is the number of years from the date of 

initiation for the program or policy until the given future year.

Excess Burden -- Unless a tax is imposed in the form of a lump sum unrelated to economic activity, such as a head 

tax, it will affect economic decisions on the margin. Departures from economic efficiency resulting from the distorting 

effect of taxes are called excess burdens because they disadvantage society without adding to Treasury receipts. This 

concept is also sometimes referred to as deadweight loss.

External Economy or Diseconomy -- A direct effect, either positive or negative, on someone's profit or welfare 

arising as a byproduct of some other person's or firm's activity. Also referred to as neighborhood or spillover effects, or 

externalities for short.

Incidence -- The ultimate distributional effect of a tax, expenditure, or regulatory program.

Inflation -- The proportionate rate of change in the general price level, as opposed to the proportionate increase in a 

specific price. Inflation is usually measured by a broad-based price index, such as the implicit deflator for Gross 

Domestic Product or the Consumer Price Index.

Internal Rate of Return -- The discount rate that sets the net present value of the stream of net benefits equal to zero. 

The internal rate of return may have multiple values when the stream of net benefits alternates from negative to 

positive more than once.

Life Cycle Cost -- The overall estimated cost for a particular program alternative over the time period corresponding

to the life of the program, including direct and indirect initial costs plus any periodic or continuing costs of operation 

and maintenance.

Multiplier -- The ratio between the direct effect on output or employment and the full effect, including the effects of 

second order rounds or spending. Multiplier effects greater than 1.0 require the existence of involuntary 

unemployment.

Page 14 of 17

http://www.whitehouse.gov/omb/circulars_a094 12/11/2013
Net Present Value -- The difference between the discounted present value of benefits and the discounted present 

value of costs.

Nominal Values -- Economic units measured in terms of purchasing power of the date in question. A nominal value 

reflects the effects of general price inflation.

Nominal Interest Rate -- An interest rate that is not adjusted to remove the effects of actual or expected inflation. 

Market interest rates are generally nominal interest rates.

Opportunity Cost -- The maximum worth of a good or input among possible alternative uses.

Real or Constant Dollar Values -- Economic units measured in terms of constant purchasing power. A real value is 

not affected by general price inflation. Real values can be estimated by deflating nominal values with a general price 

index, such as the implicit deflator for Gross Domestic Product or the Consumer Price Index.

Real Interest Rate -- An interest rate that has been adjusted to remove the effect of expected or actual inflation. Real

interest rates can be approximated by subtracting the expected or actual inflation rate from a nominal interest rate. (A 

precise estimate can be obtained by dividing one plus the nominal interest rate by one plus the expected or actual 

inflation rate, and subtracting one from the resulting quotient.)

Relative Price -- A price ratio between two goods as, for example, the ratio of the price of energy to the price of 

equipment.

Shadow Price -- An estimate of what the price of a good or input would be in the absence of market distortions, such 

as externalities or taxes. For example, the shadow price of capital is the present value of the social returns to capital 

(before corporate income taxes) measured in units of consumption.

Sunk Cost -- A cost incurred in the past that will not be affected by any present or future decision. Sunk costs should 

be ignored in determining whether a new investment is worthwhile.

Transfer Payment -- A payment of money or goods. A pure transfer is unrelated to the provision of any goods or 

services in exchange. Such payments alter the distribution of income, but do not directly affect the allocation of 

resources on the margin.

Treasury Rates -- Rates of interest on marketable Treasury debt. Such debt is issued in maturities ranging from 91 

days to 30 years.

Willingness to Pay -- The maximum amount an individual would be willing to give up in order to secure a change in 

the provision of a good or service.

APPENDIX B

ADDITIONAL GUIDANCE FOR DISCOUNTING

1. Sample Format for Discounting Deferred Costs and Benefits

Assume a 10-year program which will commit the Government to the stream of real (or constant-dollar) expenditures 

appearing in column (2) of the table below and which will result in a series of real benefits appearing in column (3). 

The discount factor for a 7 percent discount rate is shown in column (4). The present value cost for each of the 10 

years is calculated by multiplying column (2) by column (4); the present value benefit for each of the 10 years is 

Page 15 of 17

http://www.whitehouse.gov/omb/circulars_a094 12/11/2013
calculated by multiplying column (3) by column (4). The present values of costs and benefits are presented in columns 

(5) and (6) respectively.

YEAR SINCE 

INITIATION 

RENEWAL OR 

EXPANSION 

(1)

EXPECTED 

YEARLY COST 

(2)

EXPECTED 

YEARLY BENEFIT 

(3)

DISCOUNT 

FACTORS FOR 

7% 

(4)

PRESENT VALUE 

OF COSTS COL. 2 

X COL. 4 

(5)

PRESENT VALUE 

OF BENEFITS 

COL. 3 X COL. 4 

(6)

1 $10.00 $ 0.00 0.9346 $ 9.35 $0.00

2 20.00 0.00 0.8734 17.47 0.00

3 30.00 5.00 0.8163 24.49 4.08

4 30.00 10.00 0.7629 22.89 7.63

5 20.00 30.00 0.7130 14.26 21.39

6 10.00 40.00 0.6663 6.66 26.65

7 5.00 40.00 0.6227 3.11 24.91

8 5.00 40.00 0.5820 2.91 23.28

9 5.00 40.00 0.5439 2.72 21.76

10 5.00 25.00 0.5083 2.54 12.71

Total $106.40 $142.41

NOTE: The discount factor is calculated as 1/(1 + i)

t

 where i is the interest rate (.07) and t is the year.

The sum of column (5) is the total present value of costs and the sum of column (6) is the total present value of 

benefits. Net present value is $36.01, the difference between the sum of discounted benefits and the sum of 

discounted costs.

2. End-of-Year and Mid-Year Discount Factors

The discount factors presented in the table above are calculated on the implicit assumption that costs and benefits 

occur as lump sums at year-end. When costs and benefits occur in a steady stream, applying mid-year discount 

factors is more appropriate. For instance, the first cost in the table may be estimated to occur after six months, rather 

than at the end of one year to approximate better a steady stream of costs and benefits occurring over the first year. 

Similarly, it may be assumed that all other costs and benefits are advanced six months to approximate better a 

continuing steady flow.

The present values of costs and benefits computed from the table above can be converted to a mid-year discounting 

basis by multiplying them by 1.0344 (the square root of 1.07). Thus, if the above example were converted to a midyear basis, the present value of costs would be $110.06, the present value of benefits would be $147.31, and the net 

present value would be $37.25.

3. Illustrative Discount Factors for Discount Rate of 7 percent

Year since Initiation, 

Renewal or Expansion

Year-end Discount 

Factors Mid-year Discount Factors Beginning-of-year Discount Factors

1 0.9346 0.9667 1.0000

2 0.8734 0.9035 0.9346

3 0.8163 0.8444 0.8734

Page 16 of 17

http://www.whitehouse.gov/omb/circulars_a094 12/11/2013
4 0.7629 0.7891 0.8163

5 0.7130 0.7375 0.7629

6 0.6663 0.6893 0.7130

7 0.6227 0.6442 0.6663

8 0.5820 0.6020 0.6227

9 0.5439 0.5626 0.5820

10 0.5083 0.5258 0.5439

11 0.4751 0.4914 0.5083

12 0.4440 0.4593 0.4751

13 0.4150 0.4292 0.4440

14 0.3878 0.4012 0.4150

15 0.3624 0.3749 0.3878

16 0.3387 0.3504 0.3624

17 0.3166 0.3275 0.3387

18 0.2959 0.3060 0.3166

19 0.2765 0.2860 0.2959

20 0.2584 0.2673 0.2765

21 0.2415 0.2498 0.2584

22 0.2257 0.2335 0.2415

23 0.2109 0.2182 0.2257

24 0.1971 0.2039 0.2109

25 0.1842 0.1906 0.1971

26 0.1722 0.1781 0.1842

27 0.1609 0.1665 0.1722

28 0.1504 0.1556 0.1609

29 0.1406 0.1454 0.1504

30 0.1314 0.1359 0.1406

Appendix C

Discount Rates for Cost-Effectiveness, Lease-Purchase, and Related Analyses for OMB Circular No. A-94

Top of Page

En español Accessibility Copyright Information Privacy Policy Contact

USA.gov Developers Apply for a Job

Page 17 of 17

http://www.whitehouse.gov/omb/circulars_a094 12/11/2013