Partnerships BC's guidance on the selection of the discount rate, as detailed in Section 6, calls for the use of a nominal discount rate.8 In order to be consistent, the cash flows in both the PSC and Shadow Bid need to be nominal as well. Including an estimate for inflation is a key component of any cost estimates that are included to avoid undervaluing true project costs. Depending on the category of cost, specific inflation indices are used. For construction costs, a construction escalation index is estimated, usually by a QS, and is used to inflate construction-related cash flows. Construction escalation should assume expenditures are made at the mid-point of the construction period, or should be inflated according to the spend curve provided by the QS. Consideration can also be given to the applicability of escalating specific cost categories if there is sufficient, documented rationale for doing so.
To account for the effect of inflation on the long-term cost of operations, an index such as the consumer price index (CPI) is applied as part of the cost estimate of this component of the overall project cost.
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8 A nominal, or market, Discount Rate takes into account the effect of inflation.