Q. Babu Rao is an officer on special duty in the project analysis wing of the Finance department. His job is to look at the financial and economic viability of projects. Given the available budget, the projects with higher returns are picked up for funding or seeking aid from external donors. Although the procedure is involved, its principles are simple. The analysts calculate for each year of the project’s useful life, the expected expenditures and revenues. As these flows occur in different years, they have to be made comparable. For this purpose, the revenue and expenditure flows are discounted using a particular interest rate. Discounting means that their magnitudes are reduced by using a factor based on the interest rate. Due to discounting, the actual numbers of future streams of expenditure and income become smaller. The same numbers of expenditure and income of say year 5 will become smaller than those of year 3. The present values of future income and expenditure depend on two factors: interest rate and the future year in which they occur. In this process, the present value of the numbers of later years in future becomes less than that of earlier years in future. These income (benefit) and expenditure (cost) streams, which are reduced to their present values, are added and compared. In short, the projects which have higher benefit-cost ratios in terms of present values are selected for funding. In this process, a pet project of a powerful minister is dropped. The incensed minister calls Babu Rao for discussion. Babu Rao tries to explain things. But the minister berates him for slashing the solid Rs 100 crore revenue of seventh year to almost Rs 15 crore. After some discussion, the minister realises that if the interest rate used for discounting expenditure and revenue flows is reduced, the project will become viable. He asks Babu Rao to cut that rate. Babu Rao refuses saying that the rate is prescribed by the Department of Economic Affairs. Question What should Babu Rao do in the above circumstances? Follow minister’s orders. Babu Rao should give up his narrow accounting perspective and adopt a wider social point of view. He should politely express his inability to follow the minister’s instructions. He should tell the minister that he would write to the Department of Economic Affairs seeking a lowering of the rate of interest.