Many economists believe government projects that would be rejected by the private sector are funded by the government because an inappropriate discount rate is used. In this paper, the author examines in theoretical terms the choice of the discount rate for the Department of Defense. The author recommends explicitly incorporating major uncertainties using the state preference approach. The author also finds that the selection of the discount procedure is probably more important for the acceptance or rejection of a given project than is the choice of the discount rate per se. Strategic considerations that arise for military investments are also discussed.
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