Issues Involved with Calculating the Cost of Capital in the Not-for-Profit and Public Sectors

Abstract

This paper looks at issues concerned with the social rate of discount. The prime focus is on the cost of equity financing, but in the end debt financing and the net benefit flows need to enter into the net present value decision. We argue that the cost of equity to the social sector is likely to, ceteris paribus, be greater than the cost of equity to the private sector, while the cost of debt is less. The difficult area of net benefit flows when they are non-pecuniary, is noted and the philosophical issue of pre-tax and post-tax analysis is tackled.