The perspective of the study determines what discount rate to apply. If we are interested in the patient's perspective we must apply an individual discount rate. A discount rate of 0% indicates no distinction between present and future costs and benefits. We must use a private sector discount rate if we are conducting a study from the perspective of the industry sector or of private organizations (e.g., managed-care organizations). Private sector discount rates depend on factors (e.g., business conditions) that the companies face. The societal perspective requires the use of the social discount rate. The social discount rate represents the collective willingness to exchange the present for future benefits. Factors (e.g., individuals' attitudes toward society and consideration of children as part of future society) determine the social discount rate.

Future costs can be discounted by using the following formula: where You can calculate the present value from these formulas. But raising (1 + r) to the nth power requires

• patience,
• a hand-held calculator with an exponential capability, or
• the Windows calculator in scientific view.

Two additional ways that are easier and faster to use are below.

Project A costs $100 in Year 1 to implement. Project B costs $100 in Year 20.

Annual costs for Project A are

• Year 1 = $100,
• Year 2 = $200, and
• Year 5 = $300.

In the previous examples, we assumed that the present value is calculated for the beginning of Year 1 and that the costs for that first year and for subsequent years were incurred at the ends of the respective years. Therefore, for the first year, a full 12 months elapses before the first costs are incurred. So we discount the Year 1 costs. Similarly, for costs in subsequent years — if the costs occur at the ends of the years, we discount the final year fully, as well. If the present value will be calculated based on the same time that the first year costs accrue, then the costs for Year 1 cannot be considered future costs and should not be discounted. And if costs occurring in Year n occur at the beginning of Year n, we should discount those costs only for Years (n – 1). Either method of discounting is appropriate (although the results will differ by a percentage equal to the discount rate), as long as all costs are discounted consistently and systematically. The example below illustrates how results vary with the discounting method used.

Inflation is a persistent and appreciable increase in the general price level that occurs over time. This increase in general price level decreases the purchasing power of each unit of currency (e.g., $1). Because of inflation, $1 is worth less (in terms of what it can purchase) this year than last year.

Cost data are often collected from different years. Inflation renders direct comparison of unadjusted cost data inaccurate. CPI tracks the change in price of a fixed "market basket" of goods and services typically consumed by an average family in the United States. The Bureau of Labor Statistics (BLS), a federal government agency, monitors the evolution of price levels (for consumer goods, commodities, services, salaries, and wages) in the United States. CPI is presented in the form of an index: it is expressed in terms of change relative to a reference point. The reference point currently used by the BLS is 1983–1984, which means that the value of the index for that year was set at 100. Index values for years before and after 1983–1984 can be expressed in relation to that reference point. Current and historical estimates of CPI as well as information regarding the composition and computation of the index are available on the BLS Internet home page: http://www.bls.gov/cpi/ Updates are published on a monthly basis. Click this link to see the Consumer Price Index Table in Appendix B. (This window will stay open.) CPI includes a medical care component that can be used as a separate index to adjust medical prices. The following table lists the items included in the medical care component:

Unadjusted prices are referred to as "nominal prices," "nominal dollars," "current dollars," or "current prices". After these unadjusted prices are adjusted for inflation, they are referred to as "constant dollars," "constant prices," "real dollars," or "real prices." Prices can be adjusted for inflation by using the following equation: where

In conducting a cost analysis, you decide that program costs will be reported in 1999 dollars. Supply costs were collected for 1997 and therefore must be converted to the base year, 1999. Use the Consumer Price Index Table in Appendix B for the CPI values. (This window will stay open.) To adjust the 1997 supply cost of $15.00 to the 1999 price, use the following equations

We must also adjust previous year earnings to the base year to be able to make consistent comparisons. The appropriate index to use for this adjustment is the estimated annual increase in average hourly earnings, which reported annually in the March issue of Employment and Earnings from BLS. The equation that you should use for adjusting earnings is essentially the same as the one for adjusting for inflation: where

Capital costs represent expenditures on resources like equipment, buildings, and land. They are usually purchased once at the beginning of the program and have useful lives greater than 1 year. Resources with a useful life of less than 1 year that are purchased repeatedly over the lifespan of the program or intervention are called recurrent or operating costs. Drugs, office supplies, and gasoline are examples of operating costs.

Annuitizing involves determining an annual value of capital item for the life of the resource. Capital resources provide useful services over their lifespan. When calculating costs we have to take into account that this services accrue over various years of the program. Annuitizing allows us to match the services capital resources provide with their costs. Assigning the entire purchase cost to only the purchase year would overestimate that year's costs and underestimate future periods' costs. Annuitizing spreads the capital costs over the useful life of resources and provides more accurate estimates of true resource use.

Capital costs can be annuitized in three steps.

A building is purchased for $200,000 in Year 1 of a program. Let us assume that the

• useful life of the building is 10 years,
• building can be sold after 10 years for $50,000 (scrap value), and
• social discount rate is 3% per year.