HC Deb 24 April 1989 vol 151 c449W
Sir John Stanley

To ask the Secretary of State for Transport (1) further to his answer to the right hon. Member for Tonbridge and Malling on 17 March,Official Report, columns 371–72, whether, if the present year is the first year of operation of the high-speed line for the purposes of the net present value calculation referred to, the full construction costs, including the interest on construction finance, will be compounded forward to the first year of operation; and with what compounding factor;

(2) further to his answer to the right hon. Member for Tonbridge and Malling on 17 March, Official Report, columns 371–72, whether for the purposes of the net present value calculation referred to, the present year will he taken as the first year of construction or the first year of operation of the high-speed line.

Mr. Portillo

[holding replies 20 April 1989]: There is no strict rule about which year is taken as the year to which the costs and benefits of a proposed project are discounted. However, it is common practice to discount to the year in which the project is appraised (the decision year). The choice of year to be taken as the "present" year for purposes of the NPV calculation does not affect the assessment of the project's viability. If the first year of operation is taken instead of the decision year, the NPV of the construction costs will be higher, since they will have been compounded forward, but the NPV of the revenues will also be higher, since they will not have been discounted back for so many years. If the NPV is positive when discounted to one particular year, then, using the same discount rate, it will also be positive when discounted (or compounded) to any other year. The compound rate used would he the same as the discount rate to be applied to the project (and described in previous answers to my right hon. Friend). Interest charges would not be included, since the discount (or compound) rate is used to measure the cost of capital resources instead of the interest rate; to include both would be double counting.