Coppola, AndreaFernholz, FernandoGlenday, Graham2014-04-102014-04-102014-03https://hdl.handle.net/10986/17724This paper offers an assessment of the methodologies employed to estimate the economic opportunity cost of capital for public sector projects, relying on the Mexican case for an applied empirical exercise. The traditional weighted cost of capital (top-down) approach used in the estimation of Mexico's economic opportunity cost of capital is reviewed and compared to the supply price (bottom-up) approach. With respect to previous studies using the top-down approach, this paper explores the contribution of domestic savings and expands the analysis to include a more detailed examination of the available macroeconomic, labor, financial, and tax information. The re-estimated top-down economic opportunity cost of capital for Mexico comes to 10.4 percent. To confirm these results and provide additional insights regarding the alternative bottom-up approach, the economic opportunity cost of capital is estimated using the supply price plus externalities method. For the case of Mexico, this paper recommends using a combination of estimation models (both the top-down and bottom-up approaches) to check the consistency of results and re-estimating the economic opportunity cost of capital every five years to accommodate for macroeconomic and fiscal changes. More broadly, the paper acknowledges the complexities involved in the estimation of the economic opportunity cost of capital for public investment projects and underlines the relevance of additional considerations, such as changes in global economic trends and country risk ratings, tax distortions, financial sector improvements, the impact of reforms, and data availability.en-USCC BY 3.0 IGOACCOUNTINGALTERNATIVE INVESTMENTALTERNATIVE INVESTMENTSASSETSAVERAGE DEBTBANKING SECTORBASE YEARBENCHMARKBORROWING COSTSBUDGET CONSTRAINTSCAPACITY BUILDINGCAPITAL ACCOUNTCAPITAL ASSETSCAPITAL FUNDSCAPITAL GAINSCAPITAL INVESTMENTSCAPITAL MARKETCAPITAL MARKETSCAPITAL SHARECAPITAL SHARESCAPITAL STOCKSCASH BALANCESCENTRAL BANKCLOSED ECONOMIESCOMMODITYCOMPETITIVE MARKETCOMPETITIVENESSCONSUMERSCORPORATE BONDSCORPORATE INCOME TAXESCORPORATE SAVINGCOST OF CAPITALCOST OF EQUITYCOST OF FUNDSCOUNTRY CREDITCOUNTRY RISKCOUNTRY RISKSCREDIT RATINGDATA AVAILABILITYDEBTDEBT DATADEBT INTERESTDEBT RATIOSDECISION MAKINGDEVELOPMENT BANKDEVELOPMENT ECONOMICSDEVELOPMENT POLICYDIRECT INVESTMENTDISCOUNT RATEDISCOUNT RATESDIVIDENDSDOMESTIC CURRENCYDOMESTIC PRICESECONOMIC COOPERATIONECONOMIC DEVELOPMENTECONOMIC INFORMATIONECONOMIC REFORMECONOMIC REFORMSECONOMIC RESEARCHECONOMIC RESOURCESECONOMIC TRENDSECONOMIC VALUEENVIRONMENTAL SUSTAINABILITYEQUIPMENTEQUITY FINANCINGEQUITY RETURNSEXCHANGE RATEEXPANSIONARY MONETARY POLICIESEXPECTED RETURNSEXTERNAL DEBTEXTERNALITIESEXTERNALITYFACTORS OF PRODUCTIONFEDERAL RESERVEFEDERAL RESERVE BANKFINANCIAL CRISESFINANCIAL CRISISFINANCIAL FLOWSFINANCIAL RETURNFINANCIAL SAVINGSFINANCIAL SECTORFINANCIAL SERVICESFINANCIAL STRUCTUREFIXED CAPITALFOREIGN CAPITALFOREIGN EXCHANGEGDPGLOBAL EQUITYGLOBAL FINANCEGLOBALIZATIONGOVERNMENT BONDSGOVERNMENT REVENUEGOVERNMENT REVENUESGOVERNMENT SECURITIESGROSS VALUEHOUSEHOLD SAVINGSINCOMEINCOME TAXESINCOMESINFRASTRUCTURE PROJECTINFRASTRUCTURE PROJECTSINSTITUTIONAL INVESTORINTANGIBLEINTANGIBLE ASSETSINTEREST RATEINTEREST RATESINTERNAL RATE OF RETURNINTERNATIONAL BANKINTERNATIONAL BORROWINGINTERNATIONAL CAPITALINTERNATIONAL CAPITAL MARKETSINTERNATIONAL ECONOMICSINTERNATIONAL MARKETSINVENTORIESINVENTORYINVESTINGINVESTMENT CHOICESINVESTMENT FLOWSINVESTMENT FUNDSINVESTMENT INSTRUMENTSINVESTMENT MANAGEMENTINVESTMENT OPTIONSINVESTMENT PROJECTSINVESTMENT RATESLABOR MARKETSLONG-TERM INVESTMENTMACRO-ECONOMIC POLICIESMARGINAL COSTMARGINAL PRODUCTMARGINAL PRODUCTIVITYMARKET EVIDENCEMARKET INFORMATIONMARKET INTERESTMARKET INTEREST RATEMARKET PRICESMARKET RISKMARKET RISKSMARKET SHARESMARKET TRANSACTIONSMONETARY FUNDMONETARY POLICIESMONETARY SUPPLYMONOPOLYMONOPOLY RENTSNATIONAL INCOMENDPNEGATIVE EXTERNALITYNET CAPITALNET DOMESTIC PRODUCTOPEN ECONOMIESOPPORTUNITY COSTOPPORTUNITY COSTSOPTIMAL INVESTMENTOUTPUTOUTPUT OF CAPITALOUTPUTSPARTICULAR COUNTRYPENSIONPENSION FUNDSPERSONAL INCOMEPORTFOLIOPORTFOLIO INVESTMENTSPORTFOLIO MANAGEMENTPOWER PARITYPRICE ELASTICITYPRICE ELASTICITY OF DEMANDPRICE ELASTICITY OF SUPPLYPRIVATE CAPITALPRIVATE CAPITAL STOCKPRIVATE INVESTMENTPRIVATE INVESTMENTSPRIVATE SAVINGSPRODUCT MARKETSPROPERTY TAXESPROPERTY VALUESPUBLIC INVESTMENTPUBLIC POLICYPUBLIC SECTOR BONDSPUBLIC SECTOR DEBTPUBLIC STOCKSPURCHASING POWERRATE OF INVESTMENTRATE OF RETURN TO CAPITALRATES OF INTERESTRATES OF RETURNREAL INTERESTRESERVESRETURNRETURN ON ASSETSRISK PREMIUMRISK PREMIUMSSAVINGSSAVINGS INSTRUMENTSSAVINGS RATESAVINGS RATESSECURITY MARKETSSHARE OF ASSETSSHARE OF CAPITALSHARE VALUESHARES OF INVESTMENTSHARES OF INVESTMENTSSTOCK EXCHANGESTOCK MARKETSTOCK MARKET INDEXTAXTAX COLLECTIONTAX RATETAX RATESTAX REVENUESTAXATIONTRANSACTIONTRANSPARENCYTREASURYTREASURY BILLSVALUATIONVALUE ADDEDVOLATILITYWAGE RATESWAGESWEALTHWITHHOLDING TAXWORKING CAPITALWORLD ECONOMYWORLD MARKETS10.1596/1813-9450-6816