EFCOG CES Escalation Rates 4282010

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Handling Multiyear Cost Data:
Index Numbers, Escalation and
DiscountingFrancis Frank Hall
DOE / Office of Cost Analysis (CF70)
April 2010

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Multiyear Cost Data: Issues
Multiyear cost streams must often be adjusted for tworeasons:
Escalation (inflation)changes in the price level Future prices are likely to be higher
More dollars must be budgeted to buy something farther inthe future
Discountingadjusting for the time value of money Even if there were no escalation, a dollar today is worth
more than a dollar next year
22
We will address these two issues in turn

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Outline
Index Numbers
Escalation Assumptions made by the DOE
Office of Cost Analysis
Discounting and Analysis
3

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Escalation and Index Numbers
Escalation rates are normally based on index numbers.
Some contracts contain an economic rate adjustment
clause based upon an index to protect the contractors
from significant changes in prices.
Social Security, Federal Retired Pay, Medicare, and some
other federal programs are adjusted annually by an index
(normally the Consumer Price Index) to protect the
recipients from inflation.
To fully understand escalation rates, one needs to have a
basic understanding of index numbers
4

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Index Numbers Outline
Describe the term index.
Understand the difference between an
unweighted (simple) and a weighted index.
Construct and interpret Laspeyres, Paasche,and Fisher price indices.
Understand a value index.
Explain how the Consumer Price Index is
constructed and interpreted.
5

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Index Numbers
An index number measures the relative change inprice, quantity, value, or some other item of
interest from one time period to another.
A simple index number measures the relativechange in just one variable.
A weighted index number measures the relative
changes in more than one variable.
6

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Types of Indices
Unweighted/Simple Indexes
Weighted Indexes
Laspeyres Price Index
Paasche Price Index Fishers Price Index
Value Index
Special Purpose Index
Consumer Price Index
Producer Price Index
7

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Simple Index Numbers
8
According to the Energy Information Administration (EIA),In 2000 the average price of a gallon of unleaded regulargas was $1.51.In 2007 it was $2.80.What is the index forthe price of a gallon of unleaded regular gas for 2007based on 2000 prices?
P = Average Price of a Gallon of Gas in 2007 (100) =
Average Price of a Gallon of Gas in 2000
P = $2.80 (100) = 185.4
$1.51
This is an example of a simple index number

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Weighted Index Numbers
9
An index can be used compare the cost of living in onelocation to another. Consider the following weights:15% Food30% Housing6% Utilities
10% Transportation7% Health32% Miscellaneous (include other than the above)
How does the cost of living in Idaho Falls, ID comparewith Aiken, SC and Alexandria, VA?

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Weighted Index Numbers
10
An index can compare the cost of living in one location toanother. Consider the following indices
City Cost of Living Index
Idaho Falls, ID $60,000 90Aiken, SC 86
Alexandria, VA 138
If the cost of living in Idaho Falls, ID is $60,000 a
year, how does that compare to the cost of living inAiken, SC and Alexandria, VA?

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Weighted Index Numbers
11
An index can compare the cost of living in one location toanother. Consider the following indices
City Cost of Living Index
Idaho Falls, ID $60,000 90Aiken, SC $57,333 86
Alexandria, VA 138
How does the cost of living in Idaho Falls, IDcompare with Aiken, SC and Alexandria, VA?
Aiken, SC = $60,000 * (86/90)= $57,333

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Weighted Index Numbers
12
An index can compare the cost of living in one location toanother. Consider the following indices
City Cost of Living Index
Idaho Falls, ID $60,000 90Aiken, SC $57,333 86
Alexandria, VA $92,000 138
How does the cost of living in Idaho Falls, IDcompare with Aiken, SC and Alexandria, VA?
Aiken, SC = $60,000 * (86/90) = $57,333
Alexandria, VA = $60,000 * (138/90) = $92,000

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Why Convert Data to Indices?
An index is a convenient way to express a change in a diverse groupof items.
The Consumer Price Index (CPI) encompasses about 400 items
including golf balls, lawn mowers, hamburgers, funeral services, and
dentists fees. Prices are expressed in dollars per pound, box, yard,
and many other different units. Only by converting the prices of
these many diverse goods and services to one index number can
the federal government and others concerned with inflation keep
informed of the overall movement of consumer prices.
Converting data to indexes also makes it easier to assess the trendin a series composed of exceptionally large numbers.
13

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Why Convert Data to Indices?
14
Total U.S. national debt for FY 2008 was $9,985,000,000.The estimated total national debt for FY 2009 is$12,867,500,000. This increase of $2,882,500,000is significant. Yet if the FY 2009 debt is expressed asan index based on the FY 2008 debt, the increase is
Index = (2009 National Debt /2008 National Debt)*100
Index = (12,867,500,000/9,985,000,000)* 100 = 128.9
A 28.9% increase is much easier to understand.

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Escalation
Why should I be interested in escalation?
As part of the Root Cause Analysis (RCA)
Corrective Action Plan (CAP) CF70 wastasked to develop policy/guidance on definition,
development, and use of escalation rates based
on industry and geographic trends.
This was one of my first tasks at DOE
15

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Escalation
Why should YOU be interested in escalation?
You can have the best cost estimate (in constant dollars) but ifyou do not address escalation properly, your project profilewill be erroneous.
One not only needs a good database to develop a goodestimate, but also appropriate inflation indices to project costsinto the future.
DOE publishes rates that are to be used for your estimatesunless you can provide alternate rates with justification.
16

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BCI, CCI, and CEPCI Indices
To develop the DOE indices, we looked atthree key construction indices which were:
Construction Cost Index (CCI), Building Cost Index (BCI), and
Chemical Engineering Plant Cost Index (CEPCI).
17

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Predicting the Future
We use these indices to predict the future;however, as a famous philosopher said:
It is tough to make predictions,
especially about the future
.Yogi Berra
18

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Composition of CCI
19
The Construction Cost Index (CCI) comprises amarket basket of three commodities plus common
labor.
The CCI consists of 80% labor and 20% material
13%
6%1%
80%
Common Labor
Steel
Lumber
Cement

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Composition of BCI
20
The Building Cost Index (BCI) comprises a marketbasket of three commodities plus skilled labor.
10%
22%
65%
3%
Skilled Labor
Steel
Lumber
Cement
The BCI consists of 65% labor and 35% material

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Composition of CEPCI (2002)
21
The Chemical Engineering Plant Cost Index (CEPCI)comprises a market basket of eight commodities and
two types of skilled labor.
21
The CEPCI consists of 45% labor and 55% material

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Historical and Predicted Rates
2222
Why is there so much volatility in the CEPCI rates?

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Analysis of the CEPCI
23
Since there was so much volatility in theCEPCI, we decided to analyze the monthly
CEPCI rates going back to 2002.
The four major components of the CEPCI areEquipment, Construction Labor, Supervisory
Labor, and Buildings.
A multiple linear regression of the data withthe line forced through the origin revealed the
following results:
D t i i CEPCI

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Determining CEPCI
Percentages
24
Regression Statistics
Multiple R 1.0000R Square 1
Adjusted R Square 0.9863
Standard Error 0.0341
Observations 77
ANOVA
df SS MS F Sig F
Regression 4 18604651 4651162.73 4.01E+09 1.1E299
Residual 73 0.084688 0.00116012Total 77 18604651
Bi Sbi t Stat Pvalue Lower 95%Upper 95%
Intercept 0
Equip 66% 0.0002 2,687.0809 4.4E184 0.6559 0.6568
C Labor 19% 0.0008 248.8889 1.1E108 0.1868 0.1898
S Labor 9% 0.0006 160.8510 7.36E95 0.0885 0.0907
Buildings 5% 0.0006 83.3028 4.06E74 0.0497 0.0522Total 0.9853
Equip 66.6%
C Labor 19.1%
S Labor 9.1%
Buildings 5.2%
Total 1.000

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Variability of CEPCI
Components
Percent Changes
by Month
8.00%
6.00%
4.00%
2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
Jun07
Jul0
7
Aug07
Sep07
Oct07
Nov07
Dec07
Jan08
Feb08
Mar08
Apr08
May08
Jun08
Jul0
8
Aug08
Sep08
Oct0
8
Nov08
Dec08
Jan09
Feb09
Mar09
Apr09
May09
Structural supports EquipmentBuildings Engineering SupervisionConstruction Labor
25
Note the high variability of structural supports and equipment in the
CEPCI.

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Revised CEPCI Percentages
26
19%
9%
5%
67%
Equipment
Construction Labor
Supervisory Labor
Buildings
The Regression showed the CEPCI to be 28% labor and72% material. The large material component explains theincreased variability of the CEPCI. The next chart showswhat was developed to determine the DOE indices.

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Derivation of DOE Indices
BCI: Building Cost Index CCI: Construction Cost Index
CEPCI: Chemical Engineering Plant Cost Index
27
Index Nuclear Scientific
Laboratory
Admin
Warehouse
Remediation
D&D
BCI 15% 33.3% 50%
CCI 10% 33.3% 50% 100%
CEPC I 75% 33.3%

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DOE Escalation Rates
DOE Office of Cost Analysis (CF70) annually providesescalation rate assumptions for DOE projects
Used for the FY 2011 Congressional Budget Call.
Also to be used for Project analyses
2226 March 201028 Fundamentals of DOE Cost Estimating
FY Rate Index Rate Index Rate Index Rate Index2009 3.2 1.000 0.9 0.981 4.2 0.966 4.7 0.963
2010 1.9 0.981 0.3 0.977 0.9 0.974 0.9 0.972
2011 2.0 1.000 2.3 1.000 2.6 1.000 2.9 1.000
2012 1.9 1.019 2.2 1.022 2.4 1.024 2.4 1.024
2013 1.9 1.038 2.4 1.046 2.8 1.052 2.8 1.053
2014 1.9 1.058 2.4 1.071 2.8 1.082 2.8 1.0832015 1.9 1.078 2.4 1.097 2.8 1.112 2.8 1.113
2016 1.9 1.099 2.4 1.123 2.8 1.143 2.8 1.144
2017 1.9 1.119 2.4 1.150 2.8 1.175 2.8 1.176
2018 1.9 1.141 2.4 1.178 2.8 1.208 2.8 1.209
2019 1.9 1.162 2.4 1.206 2.8 1.242 2.8 1.243
2020 1.9 1.184 2.4 1.235 2.8 1.277 2.8 1.278
Nuclear ScientificLaboratory
Admin/Warehouse
Remediation/D&D

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Historical DOE Escalation Rates
29
Final 4QFY09 Escalation Rates (Nov 27, 2009)
FY Rate Index Rate Index Rate Index Rate Index
1990 1.2 0.635 2.0 0.573 2.6 0.531 2.5 0.523
1991 0.9 0.640 1.9 0.584 2.6 0.544 3.4 0.541
1992 0.0 0.640 1.9 0.595 3.5 0.563 3.1 0.558
1993 2.0 0.653 3.5 0.616 4.8 0.590 4.2 0.581
1994 3.0 0.672 3.3 0.636 3.5 0.611 3.5 0.601
1995 2.7 0.691 1.4 0.645 0.4 0.613 1.0 0.607
1996 1.0 0.697 2.6 0.662 4.0 0.637 3.5 0.629
1997 1.9 0.711 2.8 0.681 3.5 0.660 3.0 0.647
1998 0.5 0.714 1.1 0.688 1.5 0.670 1.9 0.660
1999 1.2 0.723 2.0 0.702 2.7 0.688 2.8 0.678
2000 1.0 0.730 1.2 0.710 1.3 0.696 1.6 0.689
2001 0.1 0.731 1.3 0.719 2.2 0.712 2.7 0.707
2002 1.8 0.745 2.1 0.734 2.4 0.728 3.1 0.729
2003 1.0 0.752 1.6 0.746 2.0 0.743 2.3 0.746
2004 12.7 0.848 10.8 0.827 9.3 0.812 8.3 0.807
2005 2.1 0.866 2.8 0.850 3.4 0.839 3.3 0.834
2006 8.1 0.936 5.3 0.895 3.0 0.865 3.0 0.859
2007 3.1 0.965 3.4 0.925 3.7 0.897 3.7 0.891
2008 7.0 1.033 5.0 0.972 3.5 0.927 3.3 0.920
2009 3.2 1.000 0.9 0.981 4.2 0.966 4.7 0.963
Remediation/ D&DNuclear Scientific Laboratory Admin/ Warehouse

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Escalation Rate Example
Lets do a simple example of using escalationrates.
Using the nuclear index convert $100M in
FY1998 dollars to FY2008 dollars.
30

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Escalation Rate Example
Lets do a simple example of using escalationrates.
Using the nuclear index convert $100M in
FY1998 dollars to FY2008 dollars. Answer:
$100M * (FY2008 Index/FY1998 Index)
$100M * (1.033/0.714) = $144.7M
31

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Escalation Rate Example
Lets do a more complicated example usingescalation rates.
We want to determine a cost estimatingrelationship (CER) to predict the cost in
$FY09 of radiation detector Sites and Devices
in Eastern Europe and Russia.
32

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Database used for
Radiation Detectors
33
Fiscal
Year Country Actual Costs
Escalation
Rate Index
Adjusted to
FY 2009$ Sites
RPM
QuantitiesFY07 Armenia 1,792,931 0.944 1,899,291 4 16
FY07 Azerbaijan 4,100,088 0.944 4,343,314 6 14
FY08 Estonia 778,168 0.991 785,235 2 3
FY06 Georgia 3,018,110 0.912 3,309,331 2 7
FY07 Georgia 4,821,530 0.944 5,107,553 6 30
FY04 Greece 7,866,000 0.843 9,330,961 4 52
FY08 Kazakhstan 8,214,631 0.991 8,289,234 8 27
FY08 Lithuania 1,678,634 0.991 1,693,879 3 17FY03 Russia 10,940,228 0.761 14,376,121 19 113
FY04 Russia 10,036,000 0.843 11,905,101 20 174
FY05 Russia 10,396,578 0.867 11,991,439 19 35
FY06 Russia 11,990,344 0.912 13,147,307 10 123
FY07 Russia 16,617,441 0.944 17,603,221 29 92
FY08 Russia 22,133,070 0.991 22,334,077 43 94
FY08 Slovak Republic 650,676 0.991 656,585 5 10
FY07 Ukraine 3,993,737 0.944 4,230,654 5 17185 824
Dividing the actual costs by the Scientific Escalation RateIndices provided FY 2009 constant dollars.

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Regression on
Actual/Current Dollars
34
Note: The coefficient of determination (R2) is a relatively high
.9442, but the RPM Quantity variable is not significant.
How can one tell? Why is the intercept zero?
Regression Statistics
Multiple R 0.9717R Square 0.9442 = RegSS/Total SS
Adjusted R Square 0.8688
Standard Error 2,395,136
Observations 16
ANOVA
SS df MS F Sig F Regression 1.3595E+15 2 6.79749E+14 118.49 0.00
Residual 8.0313E+13 14 5.73668E+12
Total 1.4398E+15 16
Coefficients tandard Error t Stat Pvalue Lower 95% Upper 95%
Intercept 0 #N/A #N/A #N/A #N/A #N/A
Sites 457,484 65,414 6.99 0.00 317,186 597,782RPM Quantities 30,033 14,691 2.04 0.06 (1,476) 61,541

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Regression on
FY09 Constant Dollars
35
Note: The adjusted coefficient of determination (R2) is about thesame as the previous example; however, both variables arenow significant. How can one tell?
Regression StatisticsMultiple R 0.9729
R Square 0.9465 = RegSS/Total SS
Adjusted R Square 0.8713
Standard Error 2,556,727
Observations 16
ANOVA
SS df MS F Sig F
Regression 1.61932E+15 2 8.0966E+14 123.86 0.00
Residual 9.15159E+13 14 6.5369E+12
Total 1.71084E+15 16
Coeffic ients Standard Error t Stat Pvalue Lower 95% Upper 95%
Intercept 0 #N/A #N/A #N/A #N/A #N/A
Sites 447,682 69,827 6.41 0.00 297,919 597,446
RPM Quantities 45,459 15,682 2.90 0.01 11,825 79,094

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Weakness of the Indices
36
The BCI and CCI are unweighted indices of 20 locations. Theindices would be more accurate if they were weighted.
The BCI, CCI, CEPCI, PPI, and CPI yearly rates are based upon
monthly cumulative values. Global Insight uses cumulative
values for their yearly percent change calculations. Although I was unable to obtain a rationale for this, the main
reason given is in some instances, it can reduce variability.
Given the tremendous variability of commodities during the
past year DOE used a similar method.

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FY Month/Month vs. Cum Average
BCI FY 2008 FY 2009 % ChangeSeptember 4827 4764 1.3%
Cum. Average 4619 4785 3.6%
CCI XXXXXXXX XXXXXXXX XXXXXXXX
September 8557 8586 0.3%Cum Average 8181 8566 4.7%
CEPCI XXXXXXXX XXXXXXXX XXXXXXXX
September 608.9 525.6 13.7%
Cum Average 564.7 532.8 5.6%
37
The CEPCI Change for Sept 09/Sept 08 was 13.7%. This ledus to use the Cum Average/Cum Average for DOE Indices.

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Rationale for Monthly Indices
Former members of the DoD Cost Analysis Improvement Group disagreewith dividing the averaging cumulative indices.
The idea of an annual deflator is to characterize the price of something inyear n, compared to the price of the same thing in year n1. If thereference month is December, then the annual deflator rate for year m is
the ratio of the price in December of year m+1, to the price in Decemberof year m, less one.  Dr. David A. Lee, Ph D. Mathematics,
Author of The Cost Analysts Companion
The December index shows the level at the end of the year, so if you are
looking for a year over year increase then Dec 08 / Dec 07 is appropriate.The problem with the average indices is how do you weight it? If you donot adjust for the seasonality of buying then you overweight andunderweight particular months. Dr. David C. Trybula, Ph.D Economics
38
Rationale for Cum Average

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Rationale for Cum Average
Indices
As we discussed on the phone, utilizing annual PPIs or monthlyPPIs are both valid escalation methods; just be consistent.
For further assistance, please contact the PPI Section of Index
Analysis and Public Information at 2026917705.
Sincerely,Antonio Lombardozzi
Producer Price Index
US Bureau of Labor Statistics
39

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Inflation and Escalation
40
Inflation is defined as a rise in the general level ofprices and goods and services in an economy over
period of time. It is an external economic effect.
Escalation is adjusting constant dollars to current/thenyear dollars to account for the effects of inflation.
Deescalation is adjusting current/then year dollars to
remove the effects of inflation.
Inflation and Escalation are often used interchangeably.

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Basic Terms
Current dollars, thenyear(TY) dollars, and nominal dollars all mean thesame thing.These are Budget dollars.
All refer to dollar amounts at some specified time or times stated in terms of
the prices then prevailing.
A current dollar magnitude for a past year reflects prices that prevailed during
that year (not now.)
A current dollar magnitude for a future year reflects a forecast of what the
prices will be then.
Constant dollars and real dollars are synonyms. They are dollar
magnitudes at a specified time or times, stated in the prices of a (fixed)
reference time.
Conversions between current dollars and constant dollars are
accomplished using a Price Index.
A price index is generally understood as the ratio of the overall or average
level of prices in one period relative to that of a base period. There are many
different types of price indices.41

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Escalation and Deescalation
First, Project costs should be estimated in terms ofConstant dollars.
Second, Project budgets must be assembled in terms
ofThenYeardollars using escalation factors.
Use GDP deflator from OMB or DOE Indices to
derive cost in terms of constantvalue dollars, usually
called constant dollars.
Use the GDP deflators to compute Net Present
Values (NPVs)
4242
OMB D i t d Di t R t

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OMBDesignated Discount Rates,
from OMB Circular A94 (Dec 2009)
434343
What inflation rates does OMB anticipate?
Why do these numbers increase over time?
What about different durations?
0.9%
1.6%1.9%
2.2%
2.7% 2.7%
2.3%
3.1%
3.5%
3.9%
4.4% 4.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
3Year 5Year 7Year 10Year 20Year 30Year
Project Duration
Real Rate
Nominal Rate

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Escalation Example
4444
Nuclear Example FY 2011 FY 2012 FY 2013 FY 2014
Estimated Constant dollar project
cost (FY11$M) 500 1,000 2,000 250
DOEnuclear price index (from table) 1.000 1.019 1.038 1.058
ThenYear/budget dollars (TY$M) 500 1,019 2,076 265
Start with cost stream estimated in Constant dollars
Multiply the constant dollars by the DOE Nuclear index todevelop the budget requirements in ThenYear dollars
= $3,750 FY11$M
= $3,860 TY$ M

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Deescalation Example
45
Scientific Example FY 2011 FY 2012 FY 2013 FY 2014
ThenYear budget dollars ($M) 600 1,100 2,200 600
DOEscientific price index (from
Table 1.000 1.022 1.046 1.071
Estimated Constant dollar project
cost (FY11$M)
600 1,071 2,103 560
Start with cost stream in ThenYear/budget dollars
Divide the ThenYear budget dollars by the DOE Scientific indexto develop constant dollars.
= $4,334 FY11$M
= $4,500 TY$M

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Reminders
Use Constant dollars when appropriate and usecurrent/thenyear dollars when appropriate
Constant dollars for costing
Current/thenyear dollars for budgeting
Use the appropriate DOE escalation index
The draft DOE O 415.X requires OCA approval for the use
of an alternative escalation rate.
An alternate rate requires (a) project title (b) total project cost or range (c ) reason
for the alternate escalation rate along with substantiating
data.
46

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Discounting
Because a (real) dollar today is worth
more than a (real) dollar tomorrow
47

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References
OMB Circular A
94:Guidelines and Discount Rates for BenefitCost Analysis of Federal Programs
Executive Order 12893:Principles for Federal Infrastructure
Investments
Benefits and costs should be measured and appropriatelydiscounted over the full life cycle of each project.
DOE Guidance on LifeCycle Cost Analysis: All dollar values
must be placed on a comparable basis for two reasons
Money has real earning potential over time
(need to discount)
The purchasing power of money erodes over time
(price escalation)
48

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Discounted Present Value
Compare program alternatives when costs and benefitsare distributed over time. Typical applications:
Alternative Analysis
Leaseversusbuy analyses
49

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Mechanics of Discounting
50
tiCCPVn
t )1/()(1
MultiYear: The generalization of the definition of presentvalue to a stream of costs C = Ct , t = 1, 2, 3, , n is:
One Year: The present value of an amount (of money) R1 tobe received one year in the future where i is the annual rate
of interest. is defined as:
i
RRPV
1
1
1
Simple Comparison of

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Simple Comparison of
Alternatives
51
Which alternative is better?
Fiscal Year FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 Total
Admin Warhouse 1.000 1.024 1.052 1.082 1.112 1.143 1.175
ALT 1 TY $M 248 463 970 916 410 3,007
FY11 $M 236 428 872 801 349 2,686
NPV 1.9% $M 227 404 809 729 312 2,482
ALT 2 TY $M 91 440 577 617 555 444 233 2,957
FY11 $M 91 430 548 570 499 388 198 2,725
NPV 1.9% $M 91 422 528 539 463 354 177 2,573
Comparison of Alternatives  Admin/Warehouse Project
0
200
400
600
800
1000
1200
FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Fiscal Year
MillionsinTY$
ALT 1 TY $M
ALT 2 TY $M

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Choosing a Discount Rate
Use the Treasury borrowing rate matched to: Duration of Cost and Benefit Streams
Dollars in which the costs and benefits are stated
ThenYear or Constant
Timing of Costs and Benefits Within Individual Years The actual discount factor varies depending on your assumption
about when in the year costs and benefits occur
Treasury Rates Are Updated in Annual Revisions to OMB
Circular A94, Appendix C http://www.whitehouse.gov/omb/circulars/a094/a094.html
Special considerations apply for analysis of regulations.
Consult OMB Circular A94.
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http://www.whitehouse.gov/omb/circulars/a094/a094.htmlhttp://www.whitehouse.gov/omb/circulars/a094/a094.html 
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Summary
Use ofmultiyearcost streams has to consider Escalation: changes in prices
Discounting: accounting for the time value of money
Escalation Use constant dollars for project analysis
Use thenyear dollars for budgeting
Use the appropriate index to convert
Discounting
Use net present value to compare alternatives
Use the right discount rate
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Example
54
Using the Nuclear Index fill out the table belowFiscal Year FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 Total
Nuclear NA
ALT 1 TY $M 500 500 500 400 250 2,150
FY11 $M*NPV 1.6% $M
ALT 2 TY $M 350 350 400 300 300 300 200 2,200
FY11 $M
**NPV 1.9% $M
*OMB Discount rate for constant dollars for 5 years is 1.6%
**OMB Discount rate for constant dollars for 7 years is 1.9%

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Example Solution
55
Using the Nuclear Index to fill out the table below
Fiscal Year FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 Total
Nuclear 1.000 1.019 1.038 1.058 1.078 1.099 1.119 NA
ALT 1 TY $M 500 500 500 400 250 2,150
FY11 $M 500 500 500 400 250 1,150*NPV 1.6% $M 500 472 445 420 317 1,182
ALT 2 TY $M 350 350 400 300 300 300 200 2,200
FY11 $M 350 350 400 300 300 300 200 2,200
**NPV 1.9% $M 350 327 306 327 229 214 200 1,952
*OMB Discount rate for constant dollars for 5 years is 1.6%
**OMB Discount rate for constant dollars for 7 years is 1.9%
Discounting of Nominal Dollars

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Discounting of Nominal Dollars
Using OMB Circular A94 Rates
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Fiscal Year FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 TotalNuclear 1.000 1.019 1.038 1.058 1.078 1.099 1.119 NA
ALT 1 TY $M 500 500 500 400 250 2,150
*NPV 3.1% $M 500 485 470 365 221 2,042
ALT 2 TY $M 350 350 400 300 300 300 200 2,200**NPV 3.5% $M 350 338 373 271 261 253 163 2,009
*OMB Discount rate for nominal dollars for 5 years is 3.1%
**OMB Discount rate for nominal dollars for 7 years is 3.5%
Why are these totals higher than the previous example?
Discounting of Nominal Dollars

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Discounting of Nominal Dollars
Using OMB Circular A94 Rates
57
Fiscal Year FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 TotalNuclear 1.000 1.019 1.038 1.058 1.078 1.099 1.119 NA
ALT 1 TY $M 500 500 500 400 250 2,150
*NPV 3.1% $M 500 485 470 365 221 2,042
ALT 2 TY $M 350 350 400 300 300 300 200 2,200**NPV 3.5% $M 350 338 373 271 261 253 163 2,009
*OMB Discount rate for nominal dollars for 5 years is 3.1%
**OMB Discount rate for nominal dollars for 7 years is 3.5%
Why are these totals higher than the previous example?Ans: The projected OMB Inflation rates are lower than theNuclear Index (e.g. 1.6% vs 1.9% for 7 years)

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Summary Questions
1. What are the four baskets used to calculate DOE escalationrates?
2. Which of these baskets has recently shown the most
variability, and why?
3. In regression analysis how can one tell if the overall regression
is significant?
4. In regression analysis how can one tell if the independent
variables are significant?
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Questions for Discussion
1. How have you been using escalation rates in your projects?
2. What suggestions do you have for improving the CF70
escalation rates in the future?
3. What does the draft DOE O 415.X require?