5.54 Some central government bodies sell goods or services commercially, including to the government itself. These activities may be controlled by requiring prices to be set to provide a required rate of return (RRR) on the capital employed by the activity as a whole. Government policy is generally to set charges for goods and services sold commercially at market prices, and normally to recover full costs for monopoly services, (including the cost of capital as defined in the Treasury Fees and Charges Guide)10.
BOX 11: CALCULATING THE NPV
Alternative projects, A and B, are both expected to improve the quality of a department's work and reduce staff costs. The Base Case of each is being estimated. Option A requires £10 million in initial capital expenditure to realise benefits of £2.5 million per annum for the following four years (£2 million in reduced staff costs and £0.5 million in quality improvements). Option B requires £5 million in initial capital expenditure to realise benefits of £1.5 million per annum for the following four years (£1 million reduced staff costs and £0.5 million in quality improvements). Calculation of Present values
Project B yields a positive net present value of £0.51m compared to -£0.82m for project A and zero for the implicit 'do minimum' alternative. Therefore Project B is preferable. |
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10 An update of the Guide is expected to appear on the Treasury website during 2003