EFCOG CES Escalation Rates 4-28-2010

7/29/2019 EFCOG CES Escalation Rates 4-28-2010

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Handling Multi-year Cost Data:

Index Numbers, Escalation and

DiscountingFrancis Frank Hall

DOE / Office of Cost Analysis (CF-70)

April 2010


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Multi-year Cost Data: Issues

Multi-year 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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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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11



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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12



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) CF-70 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.

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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 1.1E-299

Residual 73 0.084688 0.00116012Total 77 18604651

Bi Sbi t Stat P-value Lower 95%Upper 95%

Intercept 0

Equip 66% 0.0002 2,687.0809 4.4E-184 0.6559 0.6568

C Labor 19% 0.0008 248.8889 1.1E-108 0.1868 0.1898

S Labor 9% 0.0006 160.8510 7.36E-95 0.0885 0.0907

Buildings 5% 0.0006 83.3028 4.06E-74 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%

Jun-07

Jul-0

7

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-0

8

Aug-08

Sep-08

Oct-0

8

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

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 (CF-70) annually providesescalation rate assumptions for DOE projects

Used for the FY 2011 Congressional Budget Call.

Also to be used for Project analyses

22-26 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.

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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

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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


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 P-value 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


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 P-value 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 n-1. 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 202-691-7705.

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.

De-escalation 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, then-year(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 De-escalation

First, Project costs should be estimated in terms ofConstant dollars.

Second, Project budgets must be assembled in terms

ofThen-Yeardollars using escalation factors.

Use GDP deflator from OMB or DOE Indices to

derive cost in terms of constant-value 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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OMB-Designated Discount Rates,

from OMB Circular A-94 (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%

3-Year 5-Year 7-Year 10-Year 20-Year 30-Year

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

DOE-nuclear price index (from table) 1.000 1.019 1.038 1.058

Then-Year/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 Then-Year dollars

= $3,750 FY11$M

= $3,860 TY$ M


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De-escalation Example

45

Scientific Example FY 2011 FY 2012 FY 2013 FY 2014

Then-Year 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 Then-Year/budget dollars

Divide the Then-Year 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/then-year dollars when appropriate

Constant dollars for costing

Current/then-year 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 Benefit-Cost 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 Life-Cycle 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

Lease-versus-buy analyses

49


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Mechanics of Discounting

50

tiCCPVn

t )1/()(1

Multi-Year: 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

Then-Year 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.

52
http://www.whitehouse.gov/omb/circulars/a094/a094.htmlhttp://www.whitehouse.gov/omb/circulars/a094/a094.html


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Summary

Use ofmulti-yearcost streams has to consider Escalation: changes in prices

Discounting: accounting for the time value of money

Escalation Use constant dollars for project analysis

Use then-year dollars for budgeting

Use the appropriate index to convert

Discounting

Use net present value to compare alternatives

Use the right discount rate

5353


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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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Using OMB Circular A-94 Rates

56

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?



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Using OMB Circular A-94 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?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 CF-70

escalation rates in the future?

3. What does the draft DOE O 415.X require?

Date post:	04-Apr-2018
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EFCOG CES Escalation Rates 4-28-2010

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