ECONOMIC ANALYSIS HANDBOOK

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86-00244R000300020001-1
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 56
• Document Creation Date: December 12, 2016
• Document Release Date: July 24, 2000
• Sequence Number: 1
• Publication Date: May 1, 1971
• Content Type: MISC

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NAVY DECLASSIFICATION/RELEASE INSTRUCTIONS ON FILE
ECONOMIC
MAY 1971
Naval Facilities Engineering Command
Washington, D. C. 20390
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FOREWORD
This handbook has been developed in the Naval
Facilities Engineering Command and is issued with the
concurrence of the OPNAV Controllers Office for use
in the economic documentation of proposed Military
Construction line items. It applies to and is issued
for the information and guidance of all personnel
concerned with the financial management of construc-
tion of the Naval Shore Establishment financed by the
Military Construction Appropriation of the Department
of the Navy.
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I. GENERAL CONCEPTS
a. Navy Policy for Economic Analysis
b. Economic Analysis - General
c. Classes of Economic Analysis
1. Primary
2. Secondary
3. Primary vs. Secondary
II. ANALYTIC TECHNIQUES USED IN ECONOMIC ANALYSIS
a. Payback
b. Present Value Analysis
1. Concepts
2. Net Present Value
3. Internal Rate of Return (IRR)
4. Savings - Investment Ratio (SIR)
III. RATIONALE FOR POLICY CONCERNING ECONOMIC CHOICE
AMONG SEVERAL ALTERNATIVES
IV. PROCEDURES FOR ECONOMIC ANALYSIS IN NAVFAC
a. General
b. Economic Life
c. Interest Rate
d. Cost Data
1. One-time Cost Elements
2. Annual Cost Elements
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Table of Contents (Cont.)
3. Cost Element Quality
4. Adjustment for Inflation
5. Completeness
6. Intangibles
e. Non-Economic Considerations
f. Equivalent Mission Alternatives
g. Explanation of Source/Derivation of Estimates
V.
EXAMPLES
1.
2.
3.
APPENDIX
A:
APPENDIX
B:
APPENDIX
C:
Sample Present Value Calculations
Sample "Primary" Economic Analysis
Sample "Secondary" Economic Analysis
efinitions
resent Value Tables
ibliography
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a. Navy Policy for Economic Analysis. Economic
analyses techniques have gained increasingly widespread
support within the Department of Defense in recent years.
SECNAVINST 7000.14 of 30 January 1970 outlines the
policies and procedures to be followed in the Navy for
preparation and submission of economic analyses sup-
porting proposed Military Construction Investments.
NAVFACINST 11010.53 is written to implement and supple-
ment SECNAVINST 7000.14 with specific references to
Military Construction Investments.
b. Economic Analysis - General. It is through
economic analysis procedures that available investment
proposals are presented to decision makers and ranked
in some order of attractiveness for inclusion in the
capital budget.
The essence of an economic analysis is the com-
parison of investment costs against the benefits which
are expected to result or the comparison of costs and
benefits of various investment alternatives. The
investment and the resulting benefits are measured in
terms of dollars. Most analyses are complex, involving
the comparison of several proposals and the expenditure
of resources in the future as well as at the present
time.
Before any analysis of a proposed investment can
proceed, a certain amount of data must be generated
and arranged in a logical pattern. The estimated costs
of the proposal, including one-time investment costs,
annual costs, and net increases in working capital,
form the project cash outflows. Cash inflows may con-
sist of sale of assets or residual values attributable
to the project. These cash flows are discussed in
greater depth in Part IV, Section d.
c. Classes of Economic Analyses. Economic
Analyses may be classified as either PRIMARY or SECONDARY
as follows:
1. Primary: A PRIMARY economic analysis is
one employed to help determine whether an existing
situation or procedure should be changed in some way to
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take advantage
other situation
economic analys
book.). This a
some chance to
f dollar savings available through some
or set of procedures (A sample PRIMARY
s is contained in Part V of this hand-
alysis would discuss the basic need for
resent conditions - the basic reason.
yses might be the
Facility (NARF)
work, thereby de
inventory requir
Expansion of utility systems at
allow in-port ships to secure internal
b) Modernization of Naval Air Rework
overhaul facilities to speed overhaul
creasing the aircraft "pipeline"
ments.
) Connection to municipal utility systems
uing to operate on-base utility systems
ant increase in utility capacity is
Replace existing high maintenance cost
ipment with new facilities of similar
2. Secondary: A SECONDARY economic analysis
is one which is 4sed once a deficiency or changed j.equire-
ment has been id ntified to determine which of two (or
more) alternativ s would most economically satisfy the
deficiency. (A sample SECONDARY economic analysis is
contained in Par V of this handbook.) This type of
analysis does not concern itself with the basic need for
the construction
ways to satisfy a
deficiency. Exam,
roject but with the choice of alternative
previously stated basic need or
les of such alternatives might be:
ercial source.
Meet an increased base utility require-
present Government plant versus
Correct existing deficiencies through
ersus rehabilitation of existing
Provide new construction by one of
design concepts or by use of one of
types of construction materials.
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3. Primary vs. Secondary Analysis. Additional
discussion of the basic differences between primary and
secondary economic analyses is necessary to assure that
budget submissions reflect those differences. Primary
economic analyses are those which involve proposed
savings over an existing mode of operation. Investments
justified on the basis of a primary economic analysis
must promise absolute cost savings over the present
method of accomplishing a task.
Secondary economic analysis, on the other hand,
refers to a method of selection of the most economical
alternative from a group of alternatives all designed to
perform a function or satisfy a mission which is not
justified on the basis of dollar savings. For example,
expansion of a utility requirement is justified due to
expanded mission of an activity. The,method of providing
the additional utility requirement is selected through
the secondary economic analysis. In this case, the
selected alternative does not result in an-absolute cost
saving., but the selected alternative should represent
the least cost alternative relative to other proposed
alternatives.
Another way of stating the difference between
primary and secondary analysis is to point out the
differing impact on the Navy's expense cash flow.
Secondary economic analyses are used to justify invest-
ments which initiate the expense stream, whereas primary
economic analyses justify investments intended to reduce
an already existent expense cash flow.
The difference between projects resulting in
absolute cost savings and those resulting in increased
cost levels but which represent relatively less costly
solutions is significant in the Navy budgeting system.
NAVFACINST 11010.32B of 2 December 1969 specifies the
different methods for reporting the results of a primary
or secondary economic analysis on the DD Form 1391.
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II. ANALYTIC TECHNIQUES USED IN ECONOMIC ANALYSES
Through the yea
costs and benefi
been developed
plexity from the
sophisticated di
techniques of an
payback period,
the Present Valu
(SIR).
s, a number of methods for analyzing the
is for investment decision making have
nd written about. They range in com-
simple payback analysis to the more
scounted cash flow methods. Four
alysis will be discussed in this paper:
Internal Rate of Return (IRR) or yield,
0 (PV), and Savings Investment Ratio
a. The Pa ack Method. The payback method is a
simple expressio of the period of time estimated to
recover the inve tment cost of the project through the
incremental cash flows attributable to the project..
More specifically in the government, the payback period
is a way of stating the number of years by which future
savings will match the added investment cost.
The critical shortcoming of the payback method is
its failure to consider cash flows after the period of
recovery of and above the dollar values of the invest-
ment. For this reason it is not a measure of the prof-
itability of a potential investment and should seldom be
used to choose b tween several projects.
It is, however, sometimes desirable to express the
results of an economic analysis in terms of the "payback
period", particularly if aadressing persons not familiar
with economic analysis terminology. Later in this paper,
a mechanism for onverting SIR to "payback period" is
presented for th s purpose.
b. Present Value Analysis.
1. Concept. Since both benefits and costs
usually accrue a varying points in time, the most
meaningful comparison between the two can be made when
each are summed o a common point in time. The point in
time normally se ected for cost/benefit comparison is the
present. This relationship between the value of payments
received at different dates is of fundamental importance
in the present value, the IRR, and the SIR methods of
economic analysis.
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Because money is productive, and because there is a
strong preference for having a dollar today as compared
with having a dollar at some future time, payment of
interest is required for the use of money. The interest
rate is a convenient tool for converting costs and
benefits occurring at different points in time to
equivalent costs and benefits occurring at a single
prescribed point in time, usually the present.
(a) Future Value of Money Invested.
Suppose that if we have a dollar today we can lend it and
be sure of being repaid a year hence with interest at six
percent. If we lent the money we would get $1.06 a year
from now. It is clear that $1 today can be exchanged for
$1.06 a year for now, and is its equivalent in value. It
is conventional to speak of $1.06 as the "future worth"
of $1 for one year at six percent.
In general case, with interest rate "i" per year, the
future worth (F1) of an initial or present sum (P) after
one year is given by
F1 = P+ (P x i)
where (P+i) is the value of the
interest accrued in one year. Factoring we find
F1 = P(l + i).
This equation shows that the future worth is equal
to the initial amount times the factor (l+i). For a
present amount equal to $100 and an interest rate equal
to six percent,
F1 =
$100
(1
+ .06)
$100
(1.06)
F1 =
$106
If the $100 amount is left on deposit for five
years at six percent interest, to what amount will it
have grown at the end of that period? Returning to the
general case, the future value F1 at the end of year 1
can be reinvested at the same interest rate. Thus
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F2
F2
F1 (1 + i) = P (1 + i) (1 + i)
P(1 + i) 2
F2 = 100 (1.06) 2
where F2 is the future worth of the amount F1 after one
year, or the future worth of P after tWo years.
Similarly, F.
found as
F3
F3
, the balance after three years, is
= F2 (1 + i) = P (l + ,i) 2 (1 + i)
P (1 + i) 3
In general, n, the future (or "compound") amount
at the end of the year n is found to be
Fn
......................(1)
= P (1
+ i) n
Thus, with a interest rate of six percent, the
future value of $l00 at the end of five years is
F5
A more detailed exwere to deposit $0 percent per annum investment would b
_ $100 (1.06) 5 = $100 (1.34) = $134.
ample
is the following: If an individual
.
75 in a savings account drawing ten
compound
interest, the growth of his
as follows:
Time interest for one Year
Present
One Year
Two Years
Three Years
(b)
Time receipt). To
its present value,
above. That is, i
received at the en
present value P wi
by
$0.75 (=P)
$0.08 .83 = 75(1+.10)1
.08 .91 = 75(1+.10)2
.09 1.00 = 75(1+.10)3
Present Value of Future Money (One-
evaluate a future dollar in terms of
we must reverse the process described
F is an amount of money spent or
o? nyears from the present, then its
h respect to interest rate i is given
Fn 1
(l+i) n
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which states that the present value of a future amount.
n years from now is equal to that future amount, Fn, times
the discount factor 1 In other words, the present
(1+i)
value of a future dollar is the amount which, if
invested today at the specified interest rate, would
accumulate to the future dollar value at the future time
specified. For example, at an interest rate of ten
percent, the present value of $1 to be received three
years in the future is $0.75, since it can be seen from
the paragraph above that $0.75 invested at the present
time at a compound interest rate of ten percent per
annum will result in accumulation to $1 at the end of
three years.
The above calculations assume that cash flows
(receipts or expenditures) occur at the end of each year.
Since, in actuality, cash flows are usually staggered
throughout the year (by week, month, or quarter) some
adjustments must be made to our calculations to reflect
this situation. Table A in Appendix B of this Handbook
provides factors used to calculate the present value of
a single dollar to be received over future periods of
up to 30 years, for a discount rate of ten percent, with
adjustments for the staggered cash flows. That is, by
applying the factors in Table A Appendix B to our
assumed end of year cash flows the present value of the
cash flow is calculated as though the cash flow had
occurred throughout the year.
The present value of receiving $1 three years from
now at a discount rate equal to ten percent is
P = ($1) (Present Value Factor)
L +1 3 = $1 (.751)=$.75
This calculation assumes a year end cash flow of $1 in the
third year. Using Table A, Appendix B assumes the $1 cash
flow is staggered throughout the third year, and the present
value factor is adjusted such that
P = $1 (Adjusted Present value factor)
P = $1 (0.788) *
P = $0.79
Thus for our purposes, the present value of $1 flowing in
the third year is $0.79.
* The factor 0.788 is taken from Table A, Appendix B for
n = three years, i = ten percent.
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(c Present Value of Future Money
(received annually for succee in years). One special
case is a annual receipt (or savings year after year
of a constant amount of money. The computation of the
present value o $1 to be received annually for a period
of three consecutive years could be calculated as
follows, using able A, Appendix B.
Present Value Present Value
Dollars Factor of this year's
End of Year Received (Table A) cash flow
1
$1
0.954
2
1
0.867
3
1
0.788
$0.95
0.87
0.79
Sum of present value of Annual Cash Flows = $2.6:L
Alternativ ly, we may use Table B, Appendix B to
make the same calculation. Table B contains factors
used to calculate the present value of a single dollar
flowing annually for n years where n goes from 1 to 25
years discounting at an annual interest rate equal to
ten percent. Thus the present value of a series of
three $1 cash flows occurring at the end of years 1-3 may
be calculated as:
where P =(R)x (Present Value factor for an
annual series of cash flows for
n years discounted at ten percent)
R= the value of the constant annual cash
flow, and the present value factor is taken from Table B,
Appendix B:
= $1 x (2.61)* = $2.61
Net Present Value (NPV).
Method of Analysis. To implement the
present value approach, simply find the present value of
the expected net cash flow of an investment discounted at
the appropriate 'nterest rate, (ten percent for most Navy
investments as required by SECNAVINST 7000.14) and
subtract from it the initial cost outlay of the project.
If the net present value is positive; the project should
be accepted; if negative, it should be rejected. If two
projects are mutually exclusive, the one with the higher
net present value should be chosen.
* Taken from Table B, Appendix B with i = ten percent,
n = three year
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The formula for the net present value is
N
R
NPV= E
t -C ...........(3)
t
t=1 l+i
N
where I represents the sum of the expression from
values of t-l through t=N, i is the interest rate (ten
percent for Navy investments), t is the year of the
cash flow, Rt is the amount of the cash flow in year t,
N is the economic life of the project and C is the
initial investment cost.
The net present values of two projects, A and B,
are calculated in Table 1. Project A has a NPV of $132
while B's NPV is $472. On this basis both would be
accepted if they are independent, but B should be the
one chosen if they are mutually exclusive.
Table l.Calculating the Net Present Value
(NPV) of Projects with $1,000 Initial Cost
Project A
Project B
Discount
Net Cash Factor
PV of
Net Cash
Discount PV of
Factor Cash
Year
Flow
(10%)
Cash Flow
Flow
(10%) Flow
1
$500
.954
$477
$100
.954 $ 95
2
400
.867
347
200
.867 173
3
300
.788
236
300
.788 236
4
100
.717
72
400
.717 287
5
500
.652 326
600
.592 355
PV of Inflows 1132
$1472
Less Initial Cost -1000
-1000
NPV3
472
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3. Internal Rate of Return Method. The
internal rate f return IRR is defined as the interest
rate that equates the present value of the expected
future receipt to the cost of the investment outlay.
The equation f r calculating the IRR is:
N Rt
C = E (1+i)t ...................... (4)
where i is the
cash flow, Rt i
N is the last y
investment cost
Some value
net cash flows
and that value
of return. The
is thus somewha
interest rate, t indexes the year of
s the amount of the cash flow in year t,
ear of the project and C is the initial
of i will cause the sum of the discounted
to equal the initial cost of the project
of i is defined to be the internal. rate
IRR must be found by trial and error and
burdensome.
The IRR method (or "yield" method as it is some-
times called) i especially useful in businesses where
the internal rate of return may be compared with the
firm's cost of capital to determine the economic
desirability of the project. Except in certain special
cases the IRR method will result in the same go or no go
decision as the present value method and will rank
projects in the same order of economic desirability.
The IRR method is discussed to provide the planner
a familiarily wth the terms (so often used in invest-
ment parlance) ather than to suggest its use for
evaluating gove n.ment investments.
4. S vin s/.Investment Ratio (SIR) Method. The
SIR method is t e technique which is preferred or use in
selecting acceptable projects for inclusion in the Navy's
capital budget. The savings/investment ratio (previously
termed benefit/ cost ratio) is calculated by dividing the
present value o future savings (discounted at the pre-
scribed interes rate (10%)) by the required investment
outlay.
SI = PV (Savings)
Investment CostT
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If costs are incurred over more than one year, the
present value of investment costs is used in the denomin-
ator of the ratio
SIR = PV (Savings) ...........(5)
PV (Investment Cost)
Normally, independent projects should be accepted
whenever SIR is greater than 1.0. In the previous example
Projects A and B each cost $1000 and have a present value
of returns equal to $1080 and $1400 respectively; there-
fore the SIRs are 1.08 for A and 1.40 for B.
The term "future savings" implies that the alterna-
tive under consideration is not the least investment cost
alternative but rather one which requires some incremental
initial investment cost (over the least cost alternative)
with the promise of future cost savings. In the simple
case where an alternative, with investment equal to $1000
and savings equal to $2000, is compared with the present
condition, to go to the alternative involves an incre-
mental investment cost of $1000, with the expected return
of $2000 in future cost savings. Therefore,
SIR=Present Value (Future cost savings) _
Incremental Investment Cost
$2000 = 2.0
1000
This example illustrated the kind of investment justified
by a primary economic analysis. The investment of $1000
promised to return an absolute cost savings of $2000
resulting in a SIR equal to 2.0 and justification of the
investment.
If, however, two alternatives A and B are the only
two alternatives available to fulfill the mission, with
investment costs of $1000 and $2000 respectively, and
furthermore either A or B must be selected, then a SIR
may be calculated only for alternative B. Assuming the
present value of operating costs of B are $1800 less
than those of A,
SIRB = $1800 = 1.8
($2000 - $1000)
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Since the S
investment for a
example illustra
incurring additi
investment cost
tive savings. H
the SIR would ha
not be justified
This illustratio
alternative to p
economic grounds
analysis. After
used to select t
given project, i
the inclusion of
In any situ
the alternatives
initial investme
with the least i_
tive with the hi
IR is greater than 1.0, the additional
lternative B is justified. This
tes a case where both A and B involve
onal costs, but where the additional
of B ($1000) results in an $1800 rela-
ad the savings of B over A only been $800
e been 0.8. Alternative B would then
, and alternative A should be selected.
of the selection of the most economical
erform a mission justified on other than
is an example of a secondary economic
the Savings/Investment Ratio has been
e most economical alternative for a
t is no longer meaningful in justifying
this project in the capital budget.
ation involving multiple alternatives,
should be arrayed in ascending order of
t cost with SIR based on a comparison
vestment cost alternative. The alterna-
hest SIR should then be selected.
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The display on
calculation for suc
least cost alternat
to $100,000. In th
highest SIR; which
selected. Had the
than 1.0, then the
should be selected.
Further exampl
book as well as the
petive investments
prescribes procedur
Relationship b
Payback Period. An
ship between an inv
by the investment i
which the future sa
cost. This is the
point or the "payba
meaningful to expre
in terms of the "pa
persons not familia
Appendix B of this
used to convert a g
cost break-even poi
for the particular
equal amounts each
percent. If future
nearly the same, or
the table in Append
ment of the present
investment should r
prescribed.
NOTE: When the Sav
involved in a speci
match the figures s
interpolation/extra
investment pay-back
the preceding page shows the SIR
h a multiple alternative case. The
ive (A) has an investment cost equal
is example, alternative C has the
is also greater than 1.0, and should be
SIR for all alternatives been less
least investment cost alternative, A,
s are cited in Part V of this hand-
rationale for selecting among com-
n Part III. SECNAVINST 7000.14
s and format for developing the SIR.
tween Savings/Investment Ratio and
ther way of expressing the relation-
stment and future savings generated
to state the number of years by
ings will match the added investment
umber of years to the "break-even"
k period". It is sometimes more
s the results of an economic analysis
back period", particularly if addressing
with economic analysis terminology.
andbook contains Table C which can be
ven Savings/Investment Ratio to the
t in years (discounted payback period)
ase when future savings accumulate in
ear and the interest rate is ten
savings are not the same each year, or
the interest rate is not ten percent
x B should not be used, and a state-
value of future savings and the net
place the payback period where
ngs/Investment ratio of Economic Life
is economic analysis does not exactly
own in the table, straight-line
olation may be used to determine the
period.
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III. RATIONALE FOR POLICY CONCERNING ECONOMIC CHOICE
AMONG SEVERAL ALTERNATIVES
1. The most obvious policy statement for making an
economic choice between several equivalent competing
alternatives would be something similar to the following:
"When alternative investment proposals for achieving a
given mission/objective have the same level of expected
benefits, the alternative with the lowest discounted
cost should be preferred."
2. The above statement is true when no more than two
alternatives are under consideration. Consider, however,
the following hypothetical summary of discounted costs
for five possible mission-equivalent alternatives:
Alternative:
A
B
C
__
_
_
D
E
Investment*
100
40
O
0
5
6 00
700
Annual Costs*(present value)
1915
1532
1277
1149
1233
Total Present Value Cost*
2015
1982
1777
1749
1933
The schedule of investment opportunities shown above
displays the same alternative investments discussed in
the example of Part II, Section 4. In that example,
alternative C had the highest SIR (1.60) relative to the
least cost investment and was thus selected. The policy
statement of (1) above, however, would dictate selection
of alternative D since it represents the lowest present
value total cost of all alternatives considered. The
purpose of this section is to study the rationale for
policy concerning economic choice among several alterna-
tives in order to resolve this apparent contradiction.
3. Consider the "profitability" or savings/investment
ratio for each of the higher investment alternatives
(B, C, D and E) as compared with the least investment cost
Alternative
(A) :
a. Compare Alternative B to Alternative A:
Investment B =
450
P.V. annual costs
Alt.
A=1915
Investment A =
100
P.V. annual costs
Alt.
B=1532
Net Investment B/A =
350
P.V. savings
Alt.
B= 383
Savings/Investment Ratio B/A=383/350=1.09
15
* (All costs in $ thousands)
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b. Comps e Alternative C to Alternative A:
Inve tment C=500 P.V. annual costs Alt. A=1915
Inve tment A=100 P.V. annual costs Alt. C=1277
Net Invest ent C/A=40 P.V. savings Alt. C= 638
Savings/Investment Ratio C/A=638/400=1.60
C. Compare Alternative D to Alternative A:
Investment D=600 P.V. annual costs Ali:. A=1915
Investment A=100 P.V. annual costs Alt. D=1149
Net Invest ent D/A=500 P.V. savings Alt. D= 766
Savings
/Investment Ratio D/A=766/500=1.53
d. Compare Alternative E to Alternative A:
Investment E=700 P.V. annual costs Alt. A=1915
Investment A=10.0 P.V. annual costs Alt:. E=1233
Net Investment E/A=600 P.V. savings Alt:. E= 682
Savin s/Investment Ratio E/A=682/600=1.14
4. Consider an "incremental" savings/investment ratio
analysis:
a. Increm ntal investment for B:A 450 - 100=350
Increm ntal savings for B:A 1915 - 1532=383
Increments savings/investment ratio=383/350=1.09
b. Incremental investment for C:B 500 - 450= 50
Incremental savings for C:B 1532 - 1277=255
Increments savings/investment ratio=225/50=5.10
c. Incremental investment for D:C 600 - 500=100
Incremental savings for D:C 1277 - 1149=128
Increments savings/investment ratio=128/100=1.28
d. Increm ntal investment for E:D 700 - 600=100
Increm ntal savings for E:D 1149 - 1233=-84
Incrementa] investment does not produce savings -
disregard
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5. An analysis of this data leads to the following
observation:
a. Alternatives B, C, D and E are all "profitable"
in the sense that their added total investment over that
required for Alternative A will return future savings
(discounted) that exceed the added investment costs.
All these alternatives are a better economic choice than
A.
b. From the review of the "incremental" savings/
investment calculations, it is evident that Alternative
E should not be pursued, since the incremental investment
to go from Alternative D to Alternative E does not return
at least an equal amount of savings. In fact, the
expenditure of an additional $100,000 results in a net
increase in annual costs of $84,000. Do not choose E.
c. From additional review of the "incremental"
analysis, it is observed that the additional investment
to go from Alternative B to Alternative C results in a
much larger return than the incremental step in going
from Alternative A to Alternative B (a prerequisite to
the increment from Alternative B to C). This means that
Alternative C is preferred to Alternative B, since it
serves to greatly improve the usefulness of the invest-
ment used to arrive at the Alternative B cost. Alterna-
tive C is preferred over Alternative B.
d. The incremental investment to reach Alternative
D is "profitable" in the sense that it contributes
savings at least equal to the added investment, but the
rate of "profitability" has markedly decreased (1.28 vs.
5.10). Note that the total savings/investment ratio
comparing Alternative D against A is less than the
comparison of C against A (1.53 vs. 1.60). This reflects
the decreased "profitability" of D as compared to C. if
investment funds were not limited in availability,
Alternative D would be recommended in order to take
advantage of the cost savings (even though small) that
would result. In view of the historical constraints,
however, on investment funding (particularly MCON)
availability, the decision as to whether to proceed with
Alternative D requires a policy decision, preferably one
which directly advises whether or not the incremental
savings/investment ratio of 1.28 is high enough to be
competitive with other investment opportunities available
to the DOD.
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6. The basic management problem is that investment
funding is generally limited; i.e., there are more
"profitable" places to apply investment funding than
there are investment funds. Certainly it is important,
then, to place our investment funds where they generate
the greatest return. The most specific policy statement
which could be provided would be similar to the following:
"Disregard any incremental investments which do not
provide a saving /investment ratio of at least (some
number)." If such a policy decision can be published,
either from DOD or SECNAV, then it is recommended that
the analysis procedure for multiple investment alterna-
tives proceed"al ng the lines outlined with investment
decisions based on that stated level of incremental
"profitability" which must be reached. It is doubtful,
however, whether such a specific policy statement could
be agreed to and perhaps it is not actually required.
Another alternative rationale for choice exists which
would improve the economic choice policy over that
originally state (paragraph 1).
7. It seems clear that the "optimum" investment for the
case stated in paragraph 2 would be Alternative C. This
alternative provides the most savings for the investment
required. Although the additional $100,000 required to
go from Alternative C to Alternative D would be profitable
(S/I ratio = 1.28), the chances are that within the DOD
that additional $100,000 could be used in some other
investment proposal where the return would be greater than
1.28. The suggestion exists that if each individual
investment-proposal is optimized, then perhaps the total
DOD investment r gram would be optimized. With this
concept in min it is recommended that the criterion for
economic selectio from among several alternatives be the
following: "The economic choice shall be the alternative
which provides -the highest savin s investment ratic i_n
comparison to the alternative o east initial investment
cost." Adoption f this policy would result in implementa-
t o of Alternative C in lieu of Alternative D.
8. CAVEAT. This policy (as with most others) must be
used wit-ha little caution and common sense. For example,
an Alternative F or the case stated in paragraph 2 might
be assumed which would have an investment. cost of $100,001
and result in savings of $10, This results in a savings/
investment ratio of 10.0, which would be the economic
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choice in accordance with the recommended policy of
paragraph 7. However, this choice would only reduce the
total discounted cost figure by $9, whereas Alternative
C reduces this total cost figure by $238,000. Obviously
Alternative C would seem to be a more realistic choice.
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 Approved For Relea
a. General
are likely to ev
and formats can
situations. A s
alternatives is
general procedur
are as follows:
1. Sta
sideration and d
which will provi
quo" will be nor
although the "st
ment to make it
2. Ind
alternative, det
ment costs and f
operating and ma
useful life. It
in order of asce
Although no two individual analyses
r be identical, the basic procedures
e prescribed which will fit most
mplified procedure for comparing two
rovided by SECNAVINST 7000.1.4. The
1 steps which have been identified
e the investment problem under con-
scribe each alternative proposal
e a satisfactory solution. The "status
ally included as one of the alternatives,
tus quo" may also require some invest-
n acceptable alternative.
vidually for each stated satisfactory
rmine the estimated net initial invest-
ture annual or recurring costs of
ntaining the investment during its
is helpful to list these alternatives
ding net initial investment cost.
3. Compute the Savings/Investment Ratio for
each alternative comparing each alternative with the
alternative of 1 ast initial investment. Note that
there will be no Savings/Investment Ratio for the least
initial investment cost proposal, since it represents
the least investment cost solution to the problem. The
"profitability" f higher cost investments is the subject
under study.
4. If one of the higher investment cost
alternatives develops a Savings/Investment Ratio greater
than 1.0, then the most economic alternative is the least
initial investment cost alternative and no Savings/Invest-
ment Ratio will be reported. If one or more of the
higher investment cost alternative develops a Savings/
Investment Ratio greater than 1.0, then the least initial
investment alternative is not the economic choice. The
most economic choice will be the alternative which
develops the highest Savings/Investment Ratio. If the
dollar savings from this alternative are absolute (i.e.
the least cost a ternative is the status quo-investment
cost equal to zero dollars) then this SIR is to be used
not only in selecting the alternative but also in
justifying the p oject for inclusion in the capital budget.
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If the savings are only relative to some least cost
alternative (i.e., the absolute level of expense will
increase but the increase is less than with other
alternatives) then once the most economic alternative
is selected, the SIR is no longer useful or relevant to
project justification. For an example of this process
see Part III of this Handbook. Formats to be followed
in completing the economic analysis procedures are pre-
scribed in SECNAVINST 7000.14.
b. Economic Life.
General. The economic life of a proposal is
the period of time over which the benefits to be gained
from the proposal may reasonably be expected to accrue
to the Department of Defense (See definitions in para-
graph A of this Handbook.). Note that there may be a
significant period between the time that the investment
expenditures begin and the beginning of the period of
economic life of the facility. The economic life does
not begin until the facility has reached beneficial
occupancy and the benefits of its construction can begin
to be felt. The economic lives of the various possible
project alternatives will govern the time period to be
covered by the economic analysis. The analysis should
be made using the same base year for all alternatives.
The first year in which expenditures will have to be made
for any one of the project alternatives. The economic
life for an alternative extends through the period
during which the proposed investment will provide the
service for which the investment will be required. The
most common analysis involves the case where the alterna-
tive under consideration have the same economic lives.
If this is not the case, the analysis requires some minor
additional steps to adjust alternative costs so they may
be directly compared.
NAVFAC Guidelines. To provide a basis for comparison
between competing projects, maximum economic lives are
established for the categories of investments listed
below even though the equipment or facilities involved
may have a physical or technological life for a greater
number of years. The economic life figures shown are
the maximum allowable, and if they are not used, adequate
justification should be provided.
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8 years
(1) Aut~matic Data Processing Equipment -
dings
Permanent - 25 years
Semipermanent - 15 years
Temporary - 5 years
(3) Operating Equipment - 10 years
(4) Utilities, Plants and Utility Distribution
Systems - 15 year (This category includes investment
projects for electricity, water, gas, telephone and
similar utilities )
General.
normally expresse
the annual cost o
borrowed or used.
Government funds
part of an invest
ment usually inve
taxes instead of
Recently, however
that the amount o
ment is severely
improvements coul
well. The cost o
other investment
is just as real a
paid to a banker.
Interest is the cost of money and is
as an "Interest Rate" which expresses
money as a percentage of the amount
Historically, the interest cost of
as received little consideration as a
ent analysis, probably since the Govern-
ts money received as direct payment from
orrowing in the commercial sense.
it has been more generally understood
Government funds available for invest-
imited and any money invested in capital
have been used for other purposes as
not being able to take advantage of
pportunities (due to limited resources)
a specific stated interest rate to be
S ecifi
the cost of money
of present value,
tion's preference
dollar. SECNAVIN
benefits and cost
of ten percent.
must be accompani
tion including th
ten percent rate.
rate of ten perce
Handbook. Pre
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A specific interest rate quantifies
to an organization and, in the concept
specifically expresses that organiza-
for a present dollar versus the future
will be discounted at an annual rate
se of another interest or discount rate
d by detailed and specific justifica-
results of the analysis utilizing the
Present value tables for an interest
t are contained in Appendix B of this
ent value tables for other interest
d in standard references on the subject
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of economic analysis such as Principles of Engineering
Economy by Grant and Ireson.
d. Cost Data
1. One-time Cost Element.
(a) Investment Costs. Investment costs
are those costs associated with the acquisition of equip-
ment, real property, nonrecurring services, nonrecurring
operations and maintenance (start-up costs and other one-
time investment costs). Investment costs need not all
occur in a single year. They include:
(1) The cost of rehabilitation, modi-
fication or addition of land, buildings, machinery and
equipment.
(2) The costs of rehabilitation,
modification or other capital items such as furnishings
and fittings required to put the project on a "ready-to-
use" basis.
(3) The costs of plant rearrangement
and tooling associated with the project.
(4) The costs of freight, foundations
and installations required by the project.
(5) The value of nonrecurring services
received from others, both internal and external to the
DOD, when the cost of such services can be measured.
However, it is inappropriate to exclude these costs
simply because they may be difficult to measure.
(b) Working Capital Changes, plus or (minus).
Working capital represents funds tied up in liquid funds
or assets on hand or on order. Generally, working
capital is some form of inventory of consumables or
similar resources held in readiness for use or in stock.
Working capital changes can be plus (representing added
funding required) or minus (representing a saving in
funding). If changes are minus, ensure that the figures
entered are enclosed by parentheses ( ) so that the
savings will be subtracted from other investment costs
for the alternative. Most military construction line
items will have little or no effect on working capital,
but for purposes of illustration some examples of
possible working capital affected as a result of new
construction might be the following:
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(1) Conversion of utility plants
from coal or fue to commercial natural gas may allow
a reduction in f el stocks.
(2) Construction of modernized repair
shop facilities with new production equipment will, in-
crease the capacity of the shop, reducing "pipeline"
stocks of end it ms necessary to be maintained in the
"under repair" s atus.
(3) Construction of a supplemental
exchange gasoline filling station due to overcrowding
and congestion a the existing service station will re-
quire some incre sed capital investment to stock in-
creased gasoline storage capacity in the new tanks.
Cc) Value of Existing Assets Replaced,
(plus) or minus. In many investments, the proposed
purchase of a new piece of equipment or facility
eliminates the n ed for an existing piece of equipment
or facility. If property is redistributed to some other
Federal agency, that agency is benefitted even though
there may be no reimbursement or cash-flow to the agency
which controlled the property initially. The fair market
value of these r placed assets (as measured by sale price,
scrap value or a ternative use) should be treated as a
reduction in the required investment for decision-making
purposes. In th event the demolition cost of a facility
being replaced i an additional cost to the Government,
the figure shoul be indicated as additive rather than
deductive.
(1) Value of Existing Assets to be Employed.
The investment r :)r a given project may consist o cost
of assets to be acquired plus existing assets, i.e,.,
assets already o hand. However, the value of such
existing assets will be included in the investment. costs
only when the existing asset is currently in use (or has
an alternative, planned use) on some other project. or is
intended for sale. That is, when the use of the existing
asset will result in a cash outlay which would otherwise
not be incurred n some other project or will deprive the
Government of th cash planned to be realized by sale.
Such existing as ets will be included at their fair market
value (as measur d by market price, scrap value, or alter-
native use) and he basis for arriving at the estimate
will be document d.
24
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(e) Net Total Investment. Net Total
Investment is the algebraic sum plus and minus) of the
dollar amounts of one-time cost elements (a) through (d).
In the event these investment costs do not occur at
about the same point in time, or if the investment costs
for an alternative occur at a point in time significantly
different from the starting project year, all costs shown
must have been converted to the equivalen present value
costs for the starting project year.
(f) Future Terminal Value. Future terminal
value is an estimate of the value of the proposed invest-
ment in the distant future. Some factors affecting this
estimate include the probability of the continued need
for the facility (for governmental or private use),
appreciation, and depreciation (physical and functional).
The effect of these factors upon future value cannot
normally be estimated with any reasonable degree of
accuracy. Moreover, any salvage values realized may be
almost, or completely, offset by removal, dismantling or
disposal costs. In addition, the present value of the
terminal value of an investment (Item 9) after a 25-year
economic life span is only nine percent of the estimated
terminal value at that time. Hence, terminal values
will not ordinarily be included in the " 'anal 'si's of a
project. If, however, the terminal value is significant,
the terminal value may be included in the cost analysis.
If used, the terminal value justification must specif-
ically relate in detail the rationale for the terminal
value estimate and the degree of confidence attached to
such estimate. Particularly not any assumptions regarding
the probable need for the facility beyond the evaluation
period.
2. Annual Costs. The following paragraphs CCa)
through (d)) discuss the cost of an annual or recurring
nature which will be required to enable each alternative
to perform its function during its anticipated economic
life. Note that costs which will remain the same regard-
less of which alternative is selected need not be shown
or considered. The statement "Same for all alternatives"
may be inserted in lieu of cost figures, if appropriate.
Standard categories of costs include:
(a) Personnel. This category includes
personnel costs (civilian and military) that will result
from the implementation of the proposed project:
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(1) Civilian. Enter the cost of
civilian personnel services involved directly in the work
to be performed. The cost of civilian personnel paid at
annual rates will be gross pay as shown in current pay
tables, plus the overnment's contribution (which is
8.75% of base pay for civilian retirement, disability,
health, life insurance and where applicable, social
security programs If labor costs are determined on the
basis of direct labor hours applied, the civilian pay
rate should be in reased 29.6% to cover leave and ether
benefits of civilian pay. This factor represents the
average cost of 2).9% for sick leave taken and annual,
holiday and other paid leave accruals, plus 8.7% for
average Government contributions for other benefits. The
total cost of civilian personnel services will be 129.6%
of base pay for direct labor.
(2) Military. Enter the cost of military
personnel service involved directly in the work performed.
This cost will be computed in accordance with instructions
contained in NAVC MPTINST 7041.2A, Supp-1; and 7041.3A.
(3) Other. The sum of personnel costs
which pertain to erformance of the function under
consideration, an which are not included under items (1)
and (2) above, su h as travel, per diem and moving
expenses, personn l training, etc.
(b) operating (Itemize). This category
covers operating costs (other than labor). Each major
sub-category for which costs will be significant should
be itemized. Included might be:
(1) Materials, Supplies, Utilities,
and Other Services. The costs to the Government of
supplies and materials used in providing a product or
service. Include in this figure the cost of base trans-
portation which can be directly identified with the
function, costs for handling, storage, custody and pro-
tection of property, and the cost of utility services
including specifically, electric power, gas, water, and
communications related to the function. Cost of material
and supplies will include consideration for reasonable
overruns, spoilag or defective work.
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(2) Maintenance and Repair. The
cost of maintenance and repair to building, structures,
grounds and equipment utilized by the function involved
in producing goods or services. Capital improvements
should not be included here, but should be included with
investment costs. Include only those maintenance and
repair expenses directly attributable to the project under
analysis.
(c) Overhead (Itemize). Itemize and show
estimates of any overhead costs attributable to the pro-
ject in question, particularly those costs that change
as a result of the investment proposal. These may be
costs for accounting, legal, local procurement, medical
services, receipt, storage and issue of supplies, police,
fire and other services. Include also the costs of
terminating or cancelling any existing arrangements
which will become due as a result of undertaking the
project in question.
(d) Other (Itemize). Itemize and show any
other annual/recurring costs which may not fit any of
the other cost categories provided.
3. Cost Element. The development of acceptable
investment cost and cost savings estimates is essential
in making proper alternative choices and in gaining
acceptance of the analysis by reviewing agencies. Use
the best of readily available sources and apply standard
estimating techniques as much as possible. Acceptance of
estimates will be greatly increased by citing data
sources. Data may be derived from estimating factors
published in official manuals, extracted from historic
operating records, obtained from expert opinion, or
reduced by sound logical processes or accepted techniques
from other pertinent sources. Data used should be
credible, consistent and reflect good judgment. If data
must be assumed for lack of authoritative sources, they
should clearly be labeled as assumptions; and, if possible,
some indication made as to the sensitivity of the final
analysis as a result of the assumptions used. The effort
in obtaining solid data must obviously be somewhat
proportional to the urgency, the availability of the data,
the importance of the data to the analysis, and the
dollar size and importance of the project.
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4. Ad'us ments for Inflationary Trends. When
there is reason to believe that prices or price level
changes will significantly affect the choice between
alternative investment proposals, the analysis should
use the best avail ble data projecting material and :Labor
increases. The so rce of the data and/or the rate used
are to be included as a part of the analysis.
5. Com 1 teness. Cost factors which remain the
same regardless of which of two alternatives are selected
do not have to be reated in detail in the analysis.
A statement to this
sections will Buff'
are affected by the
be included in the
submissions, this
but the cost of co
land, leases, equi
maintenance, dispo
cost of the collat
the cost of the eq
but also the cost
other agencies. O
affected ships, air
that these operati
facility under anal
effect within the appropriate format
ce. All other costs, however, which
alternative choice considered, must
cost data. For Military Construction
ncludes not just the cost of the building
lateral equipment. and furnishings,,
ment installations, operations, utilities
al or other costs as appropriate. The
ral equipment should include not only
ipment funded by the proponent agency,
f all equipment furnished or funded by
erating costs should include costs of
craft, vehicles, etc. to the extent
g costs would be affected by the
ysis.
6. Intan ibles. As stated earlier, the scope of
this Guide is imi ed to considerations of tangible financial
costs and savings. No guidance is provided concerning
quantification or comparison of benefits which are not of
a tangible nature or which do not have specific supporting
documentation. Non-tangible benefits or tangible benefits
which are difficult to quantify are considered to be "non-
economic Considerations". Frequently, economic analyses
have been submitted which develop cost savings supported
by "This project will result in a ten percent increase in
the efficiency of cur Administrative personnel" or .The
new shop layout wi 1 improve production five percent'or
similar terminology with no specific documentation in
support of these figures or not specific indication that
the number of employees will, in fact, be reduced. Such
non-specific supporting documentation must be considered
as intangible, and not appropriate for ??consideration as
a quantitative part of the economic analysis. Provision
for intangible benefits is made through t e'addition of
comments at the en of the economic analysis or in other
sections of the Fa ility Study accompanying the line
item submittal.
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e. Non.--economic Considerations. As previously
discussed., secondary economic analyses are performed for
construction line items having their justification based
on requirements other than economic. In this case, a
SIR is not reported (except to document the selection
of the most economic alternative) but rather the non-
economic factors should be reported as required by
facilities planning documents (DOD forms 1390 and 1391)
to justify the project.
It is also possible that a particular line item may
be based on economic justification, but non-economic
considerations may force a choice of alternatives which
is less than the most economic as determined through
the procedures of the previous section. In this case,
the Facility Study accompanying the line item submission
should describe the non-economic considerations which
have resulted in the choice of an alternative other than
the one selected in accordance with the procedures of
paragraph 4. above. If the alternative selected, although
not resulting in maximum economic benefits, still offers
significant savings , -Uhe Savings/Investment Ratio calcu-
lations and economic analysis will be completed as with
any other line item offering significant cost savings.
f. Equivalent Mission Alternatives. Special atten-
tion is required to ensure that an analysis compares
equivalent mission alternatives in the sense that each
alternative considered will provide a satisfactory mission
solution. Each one must get the job done to meet at
least minimum standards of acceptability. For example,
if a barracks requirement is for 150 men, and a present
barracks can only provide 100 adequate spaces even when
renovated, then additional spaces for 50 men in new
construction must be included as a part of the renovation
alternative before comparing with an alternative of
building all 150 spaces of new construction. If another
alternative is leasing of commercial bachelor housing,
but the minimum lease available is for 200 spaces, this
alternative can be considered but no economic credit is
given for the leasing alternative providing 50 spaces more
than is required. The equivalent mission alternatives
are:
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vate existing barracks for 100 men
and build 50 newlspaces.
2. Build 150 new spaces and demolish existing
inadequate space .
3. Lease 200 spaces (50 to remain empty).
g. Explanation of Source/Derivation of Estimates.
The general arrangement of data supporting the figures
shown in the economic analysis is outlined by the formats
of SECNAVINST 70 0.14. Other than the broad format
recommended they is no specific format especially
recommended for 11 cases, since all economic analyses
will vary in content to some extent. It is strongly
recommended, however, that the arrangement of supporting
data follow as c osely as possible the arrangement of
data shown in the first sections of the formats, with
major headings underlined, so that the reviewer can
easily find the supporting data for any particular figure
without undue search. The economic analysis will :be
reviewed by pers nnel not familiar with details of the
local situation, and who will be reviewing from a critical
viewpoint. Anything that can be done to make the document
more legible or more easily followed and understood will
simplify the review effort and improve the receptiveness
of the reviewer to the proposal. Extra effort must be
made to fully explain any unusual calculations or local
irregularities which would not be apparent to a reviewer
accustomed to a standard approach. Ensure that calcula-
tions for older projects are updated to reflect latest
figures. Always double check the figures used in the
analysis against any supporting calculations.
Occasionally charges are made in the supporting calcula-
tions without changing the analysis figures or vice
versa. This is specially important when updating data
from one year to another.
Approved For Relea0e 2002/05/09 : CIA-RDP86-00244R000300020001-1
 Approve4,For Release 2002/05/09 : CIA-RDP86-M144R000300020001-1
1. Sample Present Value Calculations. Part II,
Section b. of this Handbook provides a basic discussion
of the concept of present value and the nature of its
use in the development of economic analyses. To simplify
the understanding of this concept and provide illustra-
tions of how Tables A and B may be used in calculating
the present value of savings to be received in the future
three sample present value problems are provided below:
a. Determine the present value of $100-,000 to
be received (or saved) ten years from now if the discount
rate is ten percent per annum.
Solution: From Table A, the present value of
$1 to be received at the end of ten years if the discount
rate is ten percent is $0.41. Therefore, the present
value of $100,000 to be received at the end of ten years
at a discount rate of ten percent is $100,000 x 0.41 =
$41,000.
b. Determine the present value of $10,000 to be
received (or saved) at the end of each year for a period
of ten years if the discount rate is ten percent per
annum.
Solution: From Table B, the present value
(cumulative) of $1 to be saved each year for ten years
at a discount rate of ten percent is $6.44. Therefore,
the present value of $10,000 to be saved each year for
ten years at a discount rate of ten percent is $10,000
x 6.44 = $64,400. (Note that the present value of
$10,000 saved each year for ten years is greater than
the present value of $100,000 to be saved during the
tenth year.)
c. Determine the present
value
of
the savings
to be returned during a five year
period
at
a discount
rate of ten percent if
the savings
over
the
five year
period are as follows:
At end of year #:
Savings are:
1
$20,000
2
15,000
3
10,000
4
10,000
5
10,000
Approved For Release 2002/05/09 : CIA-RDP86-00244R000300020001-1
 Approved For Relea a 2002/05/09 : CIA-RDP86-00244R000300020001-1
Solution Alt. #1: Use Table A to determine
present value f each year's savings - then total as
follows:
Year: Present Value $1:
1 $0.954
2 0.867
3 0.788
4 0.717
5 0.652
Present Value Savings:
$19,080
13,00E
7,880
7,170
6,520
TOTAL
Soluti n Alt. #2: Use Table B to determine the
present value o the 10,000 received annually and Table
A to add the in reased savings received during the first
two years as fo lows:
$10,000 sav
Addn'l $10,
Addn'1 $5,0
d for 5 years=$10,000 (3.977)=$39,770
00 in first yr=$10,000 (0.954)= 9,540
0 in 2nd yr=$5,000 (0.867)= 4,345
TOTAL 53,655
2. Sample "Primary" Economic Analysis. Assume that
Naval Station i investigating the profitability of
providing utility services to two existing wharves "Alpha"
and "Bravo" in order to allow ships in-port to secure
their power plants. Planned in-port loading is 2 LST
and 2 DD for 32 ship days/year each. Included would be
electrical, steam, salt water and compressed air utilities.
Potable water i presently available. A summary of
quantitative cost data provided or derived to complete
the analysis is shown below:
a. Co
necessary utili
t of the line item to provide the
ies to the wharves complete is $600,000.
b. Cost of military labor watchstanders now
required to man the four auxiliary ship power plants is
ti
es
mated at $140,000 per year. (Although these per-
l
sonne
will not
watches are not
utilized in othe
c. Fue
historical ship
annually.
be reassigned from their ships if these
required, they will presumably be
r ships work.)
1 cost for in-port ships based on
lays in-port is estimated at $280,000
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 Approvquor Release 2002/05/09: CIA-RDP86-' 244R000300020001-1
d. Cost of cleaning of boiler firesides and
overhaul of ship generators attributable to in-port
steaming requirements is $220,000 per year.
e. Estimated civilian'labor costs to operate
new utility plant serving these wharves would be $55,000
per year.
f. Civilian labor to provide ship connections
under proposed system is estimated to be $10,000 per
year.
g. Fuel and power operating costs of the in-
stalled utilities estimated to be $290,000 per year.
h. Maintenance cost of new utilities plant
estimated at $105,000 per year. Costs are arrayed in
varying degrees of detail (with the Savings/Investment
Ratio calculation shown) in Format A-1 recommended by
SECNAVINST 7000.14. Non-quantifiable benefits should
be itemized in FORMAT B of SECNAVINST 7000.14.
Approved For Release 2002/05/09 : CIA-RDP86-00244R000300020001-1
 Approved For Rele 2002/05/09: CIA-RDP86-0%94099980141
30 Janu~._y 1970
ECONOMIC ANALYSIS
SUM
- DEPARTMENT OF THE NAVY INVESTMENTS
ARY OF PROJECT COSTS
FORMAT A-1
1. Submitting Department of the Navy Component: Naval Station, A where, USA
2. Date of Submission: July 1970
3. Project Title: Water ront Utilities for Wharves "Alpha" & "Bravo" (P-800)
4. Description of Prdjec Objectives: The objective of this project is to
utilities services to in-port ships cons7;dering
iding shore-based utilities versus maintaining ship-
board utility systems in operation.
utilities (except existing
b. Proposed Alternative:
A. Continue present operation with no waterfront
potable water) provided at wharves "Alpha"' & "Bravo'!
B. Install permanent waterfront electrical, steam
it utilities at wharves "Alpha"- &-"Bravo" to allow
in-port shutdown of ship power plants.
7.
Recurring
9.~ 10.
1.
(Operations) Costs
A
B
Differential Discount
Present Value
Project
Present
proposed
Cost Factor
Of
Year
Alternative-
-A I ernative
(A - P
Annualsavin s
All Years
over A
1-25
Personnel
140,000
65,000
75,000
Operating
280,000
2 0,000
10,000
Maintenanc
220,000
1 5,000
115,000
12.
TOTALS 6402000
4 0,000
180,000 9, 5 2 4 *
S 1, 714 , 32 0
* Table B, Appendix B, 25 Ye
Approved For Release
rs, 107.
Attachment 2 gn 1 (2)
002/05/09 3~IA-RDP86-00244R000300026801-'~
 Approve'or Release 2002/05/09 : CIA-RDP86-00244R000300020001-1
ECONOMIC ANALYSIS - DEPARTMENT OF THE NAVY INVESTMENTS
SUMMARY OF PROJECT COSTS
FORMAT A-1
13.
Present Value of New Investment:
a. Land and Buildings
600,000
b. Equipment
c. Other (Identify nature)
d. Working Capital (Change - plus or minus)
14.
Total Present Value of New Investment (i.e.,
Funding Requirements)
$600,000
15.
Less: Present value of existing assets replaced
0
16.
Plus: Value of Existing Assets to be Employed on
the Project
0
17.
Net Investment (Line 14 minus Line 15 plus Line 16
$600,000
18.
Present Value of Cost Savings From Operations (Col. 11)1,714,320
19.
Plus: Present Value of the Cost of Refurbishment or
Modification Eliminated
0
20.
Total Present Value of Cost Savings
1,714,320
21.
Savings/Investment Ratio (Payback) (Line 20+Line 17)
2.9
SECNAVINST 7000.14
30 January 1970
Attachment 2 to Encl (2)
Approved For Release 2002/05/09 : CIA-RDP86-00244R000300020001-1
 RY OF PROJECT COSTS
FORMAT A-1 (Cont.)
22. Source/Derivation of Cost Estimates: (use as much space as required)
A B
(Itemize Project Costs)
(1) Personnel
Civili
Milita
0 0
negligible
0
65,000
140,000
0
280,000
290,000
220,000
105,000
23. Name and Title of Principal Action Officer
SECNAVINST 7000.14
30 January 1970
Attachment 2 to Encl (2)
Approved For Relea?e 2002/05/09 ?cIA-RDP86-00244R000300020001-1
 Approvi 1 or Release 2002/05/09 : CIA-RDP86-O 244R000300020001-1
3. Sample "Secondary" Economic Analysis. Assume
that a Naval Station has a 200-man deficiency in bachelor
enlisted housing due to continuing deterioration of a
present structure and updated backelor housing adequacy
criteria. Two alternative means of satisfying this
deficiency are to (1) remove the existing structure and
replace with a new barracks or to (2) rehabilitate the
existing structure to accommodate the 200 men in con-
formance with adequacy criteria. If rehabilitation is
selected, the line item must also include an addition
to the structure to provide quarters for all 200 personnel
in accordance with latest criteria. From the standpoint
of convenience and appearance, it would be desirable to
build a new structure, although this investment cost is
greater than rehabilitation. It is necessary to investi-
gate the "profitability" of new construction versus
rehabilitation through an economic analysis. Cost data
relating to the two alternatives was determined to be the
following:
a. Construction cost of new barracks is
estimated to be $480,000.
b. Demolition of existing barracks is estimated
to cost the Government $10,000.
c. Complete rehabilitation of existing barracks
including construction of the new addition is estimated
at $295,000.
d. Cost of new furnishings for either alterna-
tive is estimated at $75,000,
e. Military and Civilian labor costs will be
the same regardless of the alternative selected.
f. Estimated annual fuel/utility costs for the
new building are estimated at $21,000.
g. Estimated annual fuel/utility costs for the
rehabilitated building with addition are estimated at
$10,000.
h. Annual maintenance costs for the new building
are estimated at $10,000.
i. Annual maintenance costs for the rehabilitated
building are estimated at $19,000.
Approved For Release 2002/05/09 : CIA-RDP86-00244R000300020001-1
 low
Approved For Relea a 2002/05/09 : CIA-RDP86-00244R000300020001-1
j. Estimated terminal value of the new building
is $100,000 at the end of 25 years. Estimated terminal
value of the rehabilitated building would be $50,000 at
the end of 25 years. (Terminal value would not normally
be considered. it is being considered in this example
only for purpose of illustration of use of the formats.)
Note that this analysis is secondary in nature since
it does not address the basic need for the line item
in question. The basic requirement for this line item is
not to save dollars, but to correct physical deficiencies
in present bache or quarters available at the station.
Correction of the inadequacy by either alternative will
be costly. This economic analysis only measures the
"profitability" of the more costly investment as opposed
to the lesser investment alternative.
From the give Formats, it is seen that the Savings/
Investment Ratio for the new construction alternative as
opposed to rehabilitation is less than unity. This means
that the present value of savings -anticipated over the
first 25 years at a ten percent discount rate fails to
match the amount of added initial investment required to
construct new barracks. The new construction alternative
should perhaps be selected due to considerations of
morale, siting flexibility, or other features not relating
to economics. If that is the case, then separate
treatment of thos considerations must be provided within
the line item justification.
Approved For Relea$e 2002/05/09 : CIA-RDP86-00244R000300020001-1
 Approveor Release 2002/05/09 : CIA-RDP86-0O44R000300020001-1
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Approved For Release 2002/05/09 :3 IA-RDP86-00244R000300020001-1
 Approved For Relea
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E
OR Imik
e 2002/05/09 : CIA-RDP86-00244R000300020001-1
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Approved For Relea a 2002/05/09 : CIA-RDP86-00244R000300020001-1
 Approve'or Release 2002/05/09 : CIA-RDP86-00244R000300020001-1
H O
N r-I
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cd A
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Approved For Release 2002/05/09 : CIA-RDP86-00244R000300020001-1
 Approved For Release 2002/05/09 : CIA-RDP86-00244R000300020001-1
I
TAB
Approved For Releas 2002/05/09: CIA-RDP.86-00244R009300020001-1
 Approved r Release 2002/GPZNIIff#RflP86-0O 4R000300020001-1
DEFINITIONS
Alternative - One of two or more differing techniques or means for pro-
viding the capability required to complete a project.
Alternative Life - The period of time, in years, for a specific alternative
consisting of the sum of the alternative's Investment Period and the
alternative's Economic Life.
Annual. Costs - Expenses for personnel, material consumed in use, operating,
overhead, support services, and other items incurred on an annual
basis.
Discounting - (See Present Value).
Discount Rate - The interest rate used to discount or apply the time value
of money to future costs and benefits so as to arrive at their
present values. (See also Present Value/Time Value of Future Cash
Flows).
Economic Life - The period of time over which the benefits to be gained
from an investment may reasonably be expected to accrue to the
Department.of Defense. (Although economic life is not nece-sarily
the same as physical life or technological life, it is signifi-
cantly affected by both the obsolescence of the investment itself
and the purpose it is designed to achieve.) The economic life of
an investment begins in the year in which the investment starts
producing benefits. Thus, it is possible that the investment
'may occur several years prior to the start of an alternative's
economic life.
Equipment - Machinery, furniture, vehicles, machines used or capable of
use in the manufacture of supplies or in performance of services
or for any administrative or general plant purposes.
Envestment - The sum of money or capital employed for a given purpose or
in a given area; a security or other property right purchased or
otherwise acquired or the cost of acquisition thereof. An invest-
ment is an acquisition made in the expectation of realizing bene-
-fits beyond one year. This includes acquisitions which in
aggregate will be financed in more than one year.
Cnvestment Period - The period of time, in years, from the start of invest-
ment for an alternative until the investment is completed and the
alternative's Economic Life begi^'
?hysical Life - The estimated number of years that a machine, piece of
equipment or building can physically be used by the Department
of Defense in accomplishing the function for which it was procured
or constructed.
Approved For Release 2002/05/09 : Cl -P
tDP86-002448000300020001-1
 NAVFACINSArilitdo.d For Relea a 2002/05/09: CIA-RDP86-00244R00~3Q0020001-1
Present Value/Time Value o Future Cash Flows - In every investment,
explicit recognition should be given to the fact that a dollar
today is worth more than a dollar tomorrow because of the interest
cost which is related to all Government expenditures which occur
over time. Thus, an annual savings or cash-inflow projected for
tomorrow has a resent value (PV) less than its undiscounted
dollar value. Dollar benefits which accrue in the future cannot
be compared directly with investments made in the present because
of this time value of money. Discounting is a technique for
converting various cash flows occurring over time to equivalent
amounts at a common point in time - considering the time value
of money - to facilitate a valid comparison.
Project - A planned underta 'ng to provide a capability, but which may
have several alterative means of accomplishment.
Project Year - The time, in years, at which an event occurs as measured
from the time at which the earliest investment for any project
alternative would be made. For example, if one alternative's
investment period tarts in 1973, and another mission-equivalent
alternative's inve tment period would not start until 197;, the
investment for the second alternative could be said to start in
the third project year. The first project year is the first year
in which expenditures will have to be made for any one of the
project alternatives. The project year for any other event is
measured from the ate of the first project year.
Real Property - Land and ri hts therein, utility generation plants and
distribution syste S. buildings, structures, and improvements
thereto.
Savings/Investment Ratio - numerical ratio, when comparing two separate
alternatives, of the differences in present value of future costs
for the alternatives divided by the differences in investment costs.
The ratio is an indication of the effectiveness of higher invest-
ments in producing future cost savings.
Technological Life - The estimated number of years before technology will
make available new equipment or facilities which will make the
existing or propos d equipment or facilities obsolete.
Terminal Value - The expect d value of either existing facilities, or
facilities not yet in being, at the end of their useful life.
Approved For Relea$e 2002/05/09 : CIA-RDP86-00244R000300020001-1
 Approved For Release 2002/05/09 : CIA-RDP86-00244R000300020001-1
TAB
Approved For Release, 002/05/09 : CIA-RDP86-00244R000400020001-1
 Approved. or Release 2002/05/09 : CIA-RDP86-0W44R000300020001-1
PRESENT VALUE TABLES
TABLE A -------- PRESENT VALUE OF $1 (SINGLE AMOUNT
TABLE B -------- PRESENT VALUE OF $1 (CUMULATIVE UNIFORM SERIES)
TABLE C -------- CONVERSION TABLE - SAVINGS/INVESTMENT RATIO TO
DISCOUNTED PAY-BACK PERIOD
Approved For Release 2002/05/09 : CIA-RDP86-00244R000300020001-1
 Approved For Release 2002/05/09 : CIA-RDP86-00244R0003020001-1
o'ect Year Discount Factors
Table A Table B
PRESENT VALUE OF $1 (Single PRESENT VALUE OF $1 (Cumulative
Amount - to be used when cash- Uniform Series - to be used when
flows accrue in different cash-flows accrue in the same
amounts each year). amount each year).
Project
Year
0.954 0.954
0.867 1.821
0.788 2.609
0.717 3.326
0.652 3.977
0.592 4.570
0.538 5.108
0.489 5.597
0.445 6.042
0.405 6.447
0.368 6.815
0.334 7.149
0.304 7.453
0.276 7.729
0.251 7.980
0.228 8.209
0.208 8.416
0.189 8.605
0.172 8.771
0.156 8.933
0.142 9.074
0.129 9.203
0.117 9.320
0.107 9.427
0.097 9.524
Note: Table A factors represent an arithmetic average of beginning and
end of the year single amount factors found in standard present
value tables. Table B factors represent the cumulative sum of
the factors contained in Table A through any given project year.
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 Approved Set Release 2002/05 IA-RDP86-00244R000300020001-1
CONVERSION TABLE
SAVINGS I VE;STP,IENT RATIO TO DISCOUPPI'ED PAY-BACK PERIOD
(Interest @ 10%)
Savings/ DISCOUNTED PAY-BACK PERIOD (YRS) FOR ECONOMIC LIFE SHOWN
Investment
Ratio
5
10-
15
20
25
1.0
5.00
10.00
15.00
20.00
25.00
1.1
1
2
4.43
8.58
12.34
15.60
18.30
.
1
3.98
7.53
10.514
12.97
14.82
3
3.62
6.71
9.23
11.16
12.57
.
1
3.31
6.06
8.22
9.83
10.97
.5
1
6
3.06
5.53
7.42
8.80
9.75
.
1
2.84
5.08
6.77
7.97
8.79
.7
8
2.65
4.71
6.22
7.29
8.01
1.
1
2.48
4.38
5.76
6.72
7.36
.9
2.33
4.10
5.37
6.24
6
82
2.0
2
1
2.20
3.85
5.02
5.82
.
6.35
.
2
2.09
3.63
4.72
5.45
5.94
.2
2
.3
1.98
1
89
3.44
26
4.45
5.13
5.58
2.4
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1
8o
3.
4.21
4.85
5.27
2
2.5
.
1
73
2
6
4.00
4.6o
4.99
2.6
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1
66
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4.1
4.73
2
7
.
1
5
2.83
3.63 3
4.16
6
4.51
.
8
.
9
2.71
3.47
3.97
4.30
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1.53
2.60
3.33
3.80
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11
2.9
1.47
2.50
3.19
3.65
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3.94
3.0
1
1.42
2.40
3.07
3.50
3.78
3.
1.37
2.32
2.95
3.37
3
63
3.2
1.32
2.24
2.85
3.24
.
3.50
3.3
4
1.28
2.16
2.75
3.13
3.37
3.
1.24
2.09
2.66
3.02
3.26
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1.20
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2.57
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15
3.
3
1.17
1.96
2.49
2.83
.
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1.13
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1.10
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04
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5
.
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.83
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1.73
1.96
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6
0
.75
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6
.5
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4
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1.61
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.0
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1
1.
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ti.
5
.12 2
.12
2
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48
}
1.055
1.18
1.26
9.0
.
45
.7?
.98
1.11
1.18
9.5
.
43
70
.99
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.
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.
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.93
1.00
R_3
Approved For Release 2002/05/09 : CIA-RDP86-00244R000300020001-1
 Approved For Release 2002/05/09 : CIA-RDP86-00244R000300020001-1
TAB
Approved For Release 202/05/09 : CIA-RDP86-Q0244R000304020001-1
 ApprovedwFor Release 2002/05/09 : CIA-RDP8619244R000300020001-1
BARISH, Norman N., Economic Analysis for Engineering
and Managerial Decision Making, New York: McGraw-
Hill Book Co., Inc., 1962
DEAN, J., Capital Budgeting, Columbia University Press,
1959
GRANT, E. I. and IRESON, W. G., Principals of Engineering
Economy, 4th Ed., New York, N. Y., The Ronald Press
Company, 1964
SMITH, G. W., Engineering Economy Analysis of Capital
Expenditures, Ames, Iowa, Iowa State University
Press, 1960
QUIRIN, G. D., The Capital Expenditure Decision, Home-
wood, Illinois, Richard D. Irwin, Inc., 1967
Approved For Release 2002/05/09 : CIA-RDP86-00244R000300020001-1
 pproved.For Release 2002/05/09 : CIA-RDP86,QP244R000300020001-1
ECONOMIC ANALYSIS
HANDBOOK
DEPARTMENT OF THE NAVY
NAVAL FACILITIES ENGINEERING COMMAND
WASHINGTON, D. C. 20390
Approved For Release 2002/05/09 : CIA-RDP86-00244R000300020001-1
 Approved For Release 2002/05/09 : CIA-RDP86-00244R000300020001-1
Distribution List:
SNDL Part I (oe copy each except as indicated)
List 21 - Pleet Commanders in Chief (10 copieE each)
23A - Naval Force Commanders
24 - Type Commanders
16A - Amphibious Training Command
42A - Pleet Air Commanders
SNDL Part
List A2A
A3
A4A
AS,,
B3
E 3A
F
FKAl
FKN1
E'J27
Copy to:
Aga
B5
A2A
II
- Independent Offices
- Chief of Naval Operations, OP-441 (10 copies)
- Chief of Naval Material (5 copies)
- Bureaus (5 copies)
:Armed Forces Staff College only
Laboratory ON'P
- Activities under the Command of the Chief of
Naval Operations, less FKA1, FKN1, F~ 27
- Systems Command Headquarters (10 copies)
Enr ineering Field Divisions (10 copies)
CECOS (100 copies)
Marine Corps Headquarters
- U. S . Coast Guard
Comptroller of the Navy (only), Code NCB-2
(1.00 copies)
Approved For Release 2002/05/09 : CIA-RDP86-00244R000300020001-1