Level: Intermediate
Venue: 2019 AACE International Conference & Expo, June 16-19, 2019, New Orleans, LA, USA
Abstract: Life-cycle cost analysis (LCCA) is an important tool for determining the total cost anticipated for the life of a facility. Total costs may be converted to present values or future values, but a single time vantage point must be chosen for a meaningful analysis. Net present value is a well-known technique for normalizing future cost and benefit streams in constant dollars and discounted to the present using a real discount rate. Although nominal dollars can be used with nominal discount rates, use of real/constant dollars and real discount rates eliminates the need to estimate and include an inflation premium. The purpose of this paper is to perform a sensitivity analysis for a range of discount rates to understand their effect on NPV outcomes for pavement alternatives. Current discount rates used in professional practice are reviewed, then a range of discount rates are applied to an LCCA for two concrete pavement alternatives. The analysis finds the discount rate has a minor impact on the LCCA outcome for selecting concrete pavement alternatives. First construction cost, as opposed to future maintenance and rehabilitation costs, was the primary determinant in total life costs ranging from about 80% to 95% of total project cost. Each 1% change in the discount rate can change future rehabilitation cost by 4%.
Venue: 2019 AACE International Conference & Expo, June 16-19, 2019, New Orleans, LA, USA
Abstract: Life-cycle cost analysis (LCCA) is an important tool for determining the total cost anticipated for the life of a facility. Total costs may be converted to present values or future values, but a single time vantage point must be chosen for a meaningful analysis. Net present value is a well-known technique for normalizing future cost and benefit streams in constant dollars and discounted to the present using a real discount rate. Although nominal dollars can be used with nominal discount rates, use of real/constant dollars and real discount rates eliminates the need to estimate and include an inflation premium. The purpose of this paper is to perform a sensitivity analysis for a range of discount rates to understand their effect on NPV outcomes for pavement alternatives. Current discount rates used in professional practice are reviewed, then a range of discount rates are applied to an LCCA for two concrete pavement alternatives. The analysis finds the discount rate has a minor impact on the LCCA outcome for selecting concrete pavement alternatives. First construction cost, as opposed to future maintenance and rehabilitation costs, was the primary determinant in total life costs ranging from about 80% to 95% of total project cost. Each 1% change in the discount rate can change future rehabilitation cost by 4%.