Estimation of Economic Opportunity Cost of Capital: An Operational Guide for Mozambique

Abdallah Othman (), Glenn Jenkins () and Mikhail Miklyaev
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Abdallah Othman: Cambridge Resources International Inc.

No 2022-04, Development Discussion Papers from JDI Executive Programs

Abstract: In this paper, an analytical framework and a practical approach are developed to measure the economic opportunity cost of capital (EOCK). This national parameter is an essential determinant for practical application to the economic appraisal of investment projects in a consistent manner for a country. An application of the model is carried out for Mozambique since Mozambique is a small open economy and is also integrated into the global capital market. Estimate of the EOCK is based on the hypothesis that when funds are raised in the capital market to finance any investment project, those funds are likely to come from displaced investment, newly stimulated domestic savings, and newly stimulated foreign capital inflows. It can then be estimated as a weighted average of the opportunity cost of each of the three alternative sources of funds. The EOCK is the most appropriate rate used to discount the economic benefits and costs of a project to see if the project is economically viable for society as a whole.

Keywords: Capital Market; Discount Rate; Investment Funds; Investment Projects; Economic Growth; Mozambique (search for similar items in EconPapers)
JEL-codes: H43 O22 (search for similar items in EconPapers)
Pages: 30 Pages
Date: 2022-04-18
New Economics Papers: this item is included in nep-cfn, nep-fdg and nep-ppm
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Persistent link: https://EconPapers.repec.org/RePEc:qed:dpaper:4582

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