chart below is also based upon the Contract Pricing Reference Guide Vol 2

Chart below is also based upon the contract pricing

This preview shows page 201 - 204 out of 480 pages.

chart below is also based upon the Contract Pricing Reference Guide, Vol 2, Chapter 9, and introduces the “mid-year” Discount Factors for solving NPV problems. In the chart above: The initial period (when t = 0) includes 12 monthly payments. Rather than sum the present values of each of the 12 payments, where t would equal 0, then 1/12, then 2/12, then 3/12…all the
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CON 170, The Fundamentals of Cost and Price Analysis CON 170, Unit 2, Quantitative Methods for Contract Pricing 53 way to 11/12, we can simply calculate the present value of the entire year’s cash flows using the “mid-year” t-value of .5. From the Discount Factor Table below, this would equate to a “mid-year” DF of .9975. The next period in the chart above (when t = 1) includes 1 payment every 4 months, which equates to 3 payments in the year. Rather than sum the present values of each of the 3 payments, where t would equal 1, then 4/12, then 8/12, we can simply calculate the present value of the entire year’s cash flows using the “mid-year” t-value between t = 1 and t = 2, which is t = 1.5. From the Discount Factor Table below, this would equate to a “mid-year” DF of .9925. The final period in the chart above (when t = 2) includes 1 payment at the 6 month point. In this case, simply calculate the present value of the year’s cash flow by using the t-value halfway between t = 2 and t = 3, which is t = 2.5. From the Discount Factor Table below, this equates to a “mid-year” DF of .9901. As the chart indicates, analysts should use “mid-year” Discount Factors when an offeror proposes consecutive monthly, consecutive quarterly, or even mid-year payments. The “mid-year” Discount Factors enable us to calculate the present value of consecutive monthly payments, quarterly payments, and a single payment in the middle of a year with a single calculation, using a “t” value that ends in “.5”. In examining Contractor B’s proposed cash flow of 36 consecutive monthly payments, it is appropriate to use “mid-year” Discount Factors; but, do we have to use the “mid-year” factors and make 36 calculations? Thankfully, no. The “mid-year” Discount Factors enable us to calculate the PV of the 12 monthly payments in a year with a single calculation. Thus, for Contractor B’s proposed monthly cash flow over 3 years, we can calculate the PV with 3 calculations (not 36), using the “t” value for each year from the OMB Discount Factor Table: t = .5, t = 1.5, and t = 2.5. The next chart highlights the “mid-year” Discount Factors in our OMB Discount Factor Table. Notice, the “t” values for the “mid-year” Discount Factors end in “.5”. To calculate the PV of Contractor B’s payments, we would use the 3 “mid-year” Discount Factors highlighted in the slide below.
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CON 170, The Fundamentals of Cost and Price Analysis 54 CON 170, Unit 2, Quantitative Methods for Contract Pricing With this understanding of “end of year” and “mid-year” Discount Factors,” we are ready to calculate the NPV of each offeror, and determine which is most advantageous to the Government.
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