Economic Analysis (done) Flashcards
Explain the concept of time value of money
The value of money changes over time. Things will cost more in the future, the same amount of money won’t buy as much in the future as it does today.
Alternatives should be: (5 things)
- Suitable: meets the mission
- Feasible: can be done without constraints
- Acceptable: balances risk
- Distinguishable: distinct from other alternatives
- Complete: includes all requirements and costs
Describe the purpose of economic analysis
- Systematic approach to deciding between competing alternatives
- Weighs costs, benefits, and risks
- Doesn’t replace judgement of decision maker but aids
- To compare the NPV of each alternative
Identify situations when economic analysis is required
- Construction >$2M
- Repair >$20M
- Repair >$2M that also hits the 75% rule (total cost >75% replacement cost)
- Total investment over FYDP >$50M
- All relocatable (temporary) facilities
- Demolition/change of cultural/historic facilities
Describe the economic analysis process
- Define objectives
- Determine alternatives
- Define assumptions
- Cost analysis
- Benefit analysis (address intangibles)
- Comparison of Alternatives
- Sensitivity Analysis (risks of bad assumptions)
- Document the analysis
When do you use present worth given future worth?
When there is just a future cost, meaning there is a one time cost at some year in the future
Ex. At year 12, it will cost $13,000 to repair
When do you use present worth given geometric gradient?
When there is an annual reoccurring cost that increases by some percentage each year
Ex. There is a maintenance cost that increases by 5% each year
When do you use present worth given annual worth?
When there is a fixed, annual, reoccurring cost
Ex. A station uses an annual energy cost of $1200 per year
When do you use present worth given arithmetic gradient?
When you have a reoccurring annual cost that increases by a fixed amount each year
Ex. A trash fee costs $100 and will increase by $100 each year
You must consider what options before using an alternative? (4 things)
- Status quo (do nothing)
- Build new (or replace item)
- Modify/repair
- Lease
What is generally used as the term on analysis?
The life span
What affects the interest rate and what kind of interest rate do we use for this class?
Affected by: Inflation, alternative returns on investments (bond rates), impacts of contributions to national debt
- We will use “simple interest rate”, no compounding
What is the difference between nominal and real interest?
Both are annual interest but nominal does not consider inflation where real interest is adjusted to consider inflation
*We use real interest in this class
What is an initial cost?
P, occurs at day “0”
What is an annual cost?
A, uniform cost occurring at the end of each year
What is a future cost?
F, single point costs at some year (ex repairs, overhauls etc)
What circumstances allow for an EA waiver?
- Cost of EA outweighs benefit of information
- Urgent project to correct violations involving health, safety, fire protections, pollution, or security
- Project in mandated by a source DoD or higher
- Only 1 viable option exists (rare)
What are the four levels of analysis to compare alternatives?
- Programmed amount
- Life cycle costs in NPV (shows the most economic solution)
- Non monetary factors that affect the solution
- If desired, weighted benefit analysis
