In practice it is rather difficult, if not impossible, to find another project that could be used for determining these opportunity costs. Therefore, the value is estimated of those resources that will be applied with the current project.
For the judgement of alternatives, only those resources are relevant that can be utilized in an alternative way. Costs for which this is not possible (so-called sunk costs) can not be taken into account.
In principle, the costs should be considered over the lifetime of an alternative. This refers to both the investment costs (done in the initial years of the project) and the exploitation and maintenance costs (yearly costs). For this it is needed to take changes in price levels and inflation into account. And these are subject to a large range of uncertainty. Therefore, these cost calculations are based on constant prices at a fixed moment (normally those of the year in which the study is carried out). Relative changes, however, should be included.
It is possible to determine for each alternative the total costs in an integral way, resulting in the real costs that are needed for project realisation. However, such totals are rather difficult to interpret, especially when complex alternatives are investigated. This is also valid when effects need to be compared. Simply adding up all costs or the average costs per year does not give any information on the time in future that these costs will be made.
A common way to avoid this problem is discounting, with which the present worth of a future amount of costs (or benefits) can be obtained. Discounting results in determining money flows of certain years in future to a certain base year. For this, use is made of a discounting factor, which is expressed as:
For example, the discount factor for costs that occur in year 3 are (for a discount rate of 5%):
So, US$ 100,000 to be spent in year 3 correspond to a discount value of US$ 88,380 in the base year.
A crucial point is which discount rate should be used. This very much depends on the project initiator. For the Dutch Government, the discount rate for governmental projects is set at 5%. This percentage includes the difference between interest and inflation. Such percentage is also valid for countries with high inflation rates, as then also interest rates will be high. This percentage is uniform and is 'without risk':
In addition, it was decided that projects can only be implemented when the government budget allows for it.
It should be noted that the way of financing an alternative may result in certain effects. For the determination of these type of effects, insight is needed in the costs. In contradiction with the practice in the private sector, the Dutch government does not make a direct link between ways of financing and its desirability. So, interest costs are left out of consideration. Consequently, there is only an indirect link when financing of alternatives is being judged.