CIRCULAR A-94

GUIDELINES AND DISCOUNT RATES

FOR BENEFIT-COST ANALYSIS OF FEDERAL PROGRAMS
CIRCULAR NO. A-94

(Transmittal Memo No.64)

MEMORANDUM FOR HEADS OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS

SUBJECT: Guidelines and Discount Rates for Benefit-Cost Analysis

 of Federal Programs

Table of Contents Page

1. Purpose .................................................... 1 

2. Rescission ................................................... 2 

3. Authority .................................................... 2 

4. Scope .................................................... 2 

5. General Principles ........................................... 3 

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 ................. 5 

a. Identifying Benefits and Costs

b. Measuring Benefits and Costs

7. Treatment of Inflation ....................................... 6 

a. Real or Nominal Values

b. Recommended Inflation Assumption

8. Discount Rate Policy ......................................... 7 

a. Real versus Nominal Discount Rates

b. Public Investment and Regulatory Analyses

c. Cost-Effectiveness, Lease-Purchase, Internal

Government Investment, and Asset Sale Analyses

9. Treatment of Uncertainty ..................................... 10

a. Characterizing Uncertainty

b. Expected Values

c. Sensitivity Analysis

d. Other Adjustments for Uncertainty

10. Incidence and Distributional Effects ......................... 11

a. Alternative Classifications

b. Economic Incidence

11. Special Guidance for Public Investment Analysis .............. 12

a. Analysis of Excess Burdens

b. Exceptions

12. Special Guidance for Regulatory Impact Analysis .............. 12

13. Special Guidance for Lease-Purchase Analysis ................. 12

a. Coverage

b. Required Justification for Leases

c. Analytical Requirements and Definitions

14. Related Guidance ............................................. 16

15. Implementation ............................................... 16

16. Effective Date ............................................... 16

17. Interpretation ............................................... 16

Appendix A: Definitions of Terms .................................. 17

Appendix B: Additional Guidance for Discounting ................... 20

Appendix C: Discount Rates for Cost-Effectiveness, Lease- 

 Purchase, and Related Analyses .................... 22

1. Purpose. The goal of this Circular is to promote efficient resource 

allocation through well-informed decision-making by the Federal Government. It 
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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 lease- purchase 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.

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:

(1) Water resource projects (guidance for which is the approved Economic 

and Environmental Principles and Guidelines for Water and Related 

Land Resources Implementation Studies). 
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(2) The acquisition of commercial-type services by Government or 

contractor operation (guidance for which is OMB Circular No. A-76).

(3) Federal energy management programs (guidance for which can be found 

in the Federal Register of January 25, 1990, and November 20, 1990).

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 policy decision 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.)

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:

(1) 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.

(2) Quantifying benefits and costs is worthwhile, even when it is not 

feasible to assign monetary values; physical measurements may be 

possible and useful.
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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. Cost-effectiveness 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. 

(1) 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.

(2) 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.

(3) 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.

(4) Verification. Retrospective studies to determine whether 

anticipated benefits and costs have been realized are potentially 

valuable. Such studies can be used to determine necessary 
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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 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.

(1) 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.

(2) 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.

(3) 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.

(4) 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 
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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.

(1) 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.

(2) 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.

(3) 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.

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 
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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 lease-purchase 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 

Mid-Session 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.

(1) 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 inflation from a nominal interest rate.

(2) 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.

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.
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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.

(1) 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.

(2) 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.

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.

(3) 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.

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:

(1) 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 
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nominal Treasury rates for discounting, as described in the 

following paragraph.)

(2) 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 should use the real 

Treasury borrowing rate, described in the preceding paragraph.)

(3) 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.

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 
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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.

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 
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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 
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subsidy is incorporated in asset values, its distributional effects can 

change.

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 cost-saving 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:

(1) The lease-purchase analysis concerns a capital asset,

(including durable goods, equipment, buildings, facilities, 

installations, or land) which:

(a) Is leased to the Federal Government for a term of three or 

more years; or,
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(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).

(2) The lease-purchase analysis concerns a capital asset or a group of 

related assets whose total fair market value exceeds $1 million.

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:

(1) 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;

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

or

(c) The total purchase price of the asset or group of assets to be 

leased would exceed $500 million.

(2) 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.

(3) 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:

(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.
−15−

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.

(1) 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.)

(2) 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.

(3) 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.

(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).)

(4) 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 financing.

(5) 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:
−16−

(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.)

(6) 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.

(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.

(7) 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 
−17−

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.

(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."

9. "Joint OMB and Treasury Guidelines to the Department of Defense Covering 

Lease or Charter Arrangements for Aircraft and Naval Vessels."

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," Federal Register, Vol. 55, No. 17, January 

25, 1990, and Vol. 55, No. 224, November 20, 1990.

k. 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).
−18−

APPENDIX A

DEFINITION OF TERMS

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 riskaverse 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 
−19−

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.

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.
−20−

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.
−21−

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 

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 
−22−

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 mid-year 

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 BeginningInitiation, Year-end Mid-year of-year

Renewal or Discount Discount Discount

Expansion Factors Factors Factors

 1 0.9346 0.9667 1.0000

 2 0.8734 0.9035 0.9346

 3 0.8163 0.8444 0.8734

 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