For details see omb circular a 94 guidelines and

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Unformatted text preview: ng the 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 life-cycle cost, and is generally treated as a negative cost. Costs Occurring Over Time. The life-cycle 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.

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