A marginal cost of funds approach to multi-period public project evaluation: implications for the social discount rate

Although the use of marginal cost of funds (MCF) has been widely appreciated in public finance literature, discussions of MCF have been confined to a static setting. This paper develops a multi-period project evaluation rule that is based on MCF. Unlike previous approaches, the parameters required for implementing the MCF rule are independent of projects under consideration. A lesson from this paper is that the government discount rate policies that are largely based on the concepts of social discount rate and shadow price of capital should be rewritten with the use of parameters representing MCF.