The timing and amount of cash flows will differ between the procurement options. To evaluate the impact of these differing cash flows and recognize the time value of money all costs are valued at a single date. Using the present value of cash flows that occur at different times is a standard method to compare the value of money over time as a dollar today is worth more than a dollar tomorrow because of interest and inflation. The present value is produced by applying an interest rate and an inflation rate (collectively called the "discount rate") to a future sum.
The discount rate is generally the government's cost of debt. The discount rate is calculated by Alberta Finance and Enterprise and is based on the rate the government will be required to pay for debt with a similar structure, term and payment stream and considers the cost of issuing that debt. The riskiness of the project is not factored in the discount rate as project risks are generally assessed and quantified outside of the discount rate, and increasing the discount rate by adding a risk premium would lead to illogical results when evaluating project costs as a riskier project (with a higher discount rate) would have a lower net present value cost than a less risky project (with a lower discount rate).
The discount rate for a project will be calculated by Alberta Finance and Enterprise based on capital markets and other factors at the time the analysis is done.