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way future resources are spent can be made. Sunk
costs may alter the cost of continuing with a particular
alternative relative to others, but when choosing
among alternatives, only those costs that remain
should be counted.
At the end of its useful life, a system may
have a positive residual or salvage value. This value
exists if the system can be sold, bartered, or used by
another system. This value needs to be counted in
lifecycle cost, and is generally treated as a negative
cost.
Costs Occurring Over Time. The lifecycle cost
combines costs that typically occur over a period of
several years. Costs incurred in different years cannot
be treated the same because they, in fact, represent
different resources to society. A dollar wisely invested
today will return somewhat more than a dollar next
year. Treating a dollar today the same as a dollar next
year
ignores
this
potential
trade. NASA Systems Engineering Handbook
Systems Analysis and Modeling Issues
Calculating Present Discounted Value
Calculating the PDV is a way of reducing a stream of
costs to a single number so that alternative streams
can be compared unambiguously. Several formulas
for PDV are used, depending on whether time is to be
treated as a discrete or a continuous variable, and
whether the project's time horizon is finite or not. The
following equation is useful for evaluating system
alternatives when costs have been estimated as
yearly amounts, and the project's anticipated useful
life is T years. For alternative i,
T
PDVi = Σ Cit (1 + r)t
t=0
where r is the annual discount rate and Cit is the estimated cost of alternative i in year t.
Once the yearly costs have been estimated, the
choice of the discount rate is crucial to the evaluation
since it ultimately affects how much or how little
runout costs contribute to the PDV. While calculating
the PDV is generally accepted as the way to clear with
costs occurring over a period of years, there is much
disagreement and confusion over the appropriate
discount rate to ap...
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This document was uploaded on 02/26/2014 for the course E 515 at University of Louisiana at Lafayette.
 Spring '13
 Mr.Kau
 Systems Engineering, The American, ... ...

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