Handling Multi-year Cost Data: Index Numbers, Escalation and Discounting

Francis Frank Hall DOE / Office of Cost Analysis (CF-70) April 2010

Multi-year Cost Data: Issues

Multi-year cost streams must often be adjusted for two reasons:

Escalation (inflation) changes in the price level

Future prices are likely to be higher More dollars must be budgeted to buy something farther in the future Even if there were no escalation, a dollar today is worth more than a dollar next year
We will address these two issues in turn

Discounting adjusting for the time value of money

Outline

Index Numbers Escalation Assumptions made by the DOE Office of Cost Analysis Discounting and Analysis

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

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.

Index Numbers

An index number measures the relative change in price, quantity, value, or some other item of interest from one time period to another. A simple index number measures the relative change in just one variable. A weighted index number measures the relative changes in more than one variable.

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

Simple Index Numbers

According to the Energy Information Administration (EIA), In 2000 the average price of a gallon of unleaded regular gas was $1.51.In 2007 it was $2.80.What is the index for the price of a gallon of unleaded regular gas for 2007 based 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

An index can be used compare the cost of living in one location to another. Consider the following weights: 15% Food 30% Housing 6% Utilities 10% Transportation 7% Health 32% Miscellaneous (include other than the above) How does the cost of living in Idaho Falls, ID compare with Aiken, SC and Alexandria, VA?

Weighted Index Numbers

An index can compare the cost of living in one location to another. Consider the following indices City Idaho Falls, ID Aiken, SC Alexandria,VA Cost of Living $60,000 Index 90 86 138

If the cost of living in Idaho Falls, ID is $60,000 a year, how does that compare to the cost of living in Aiken, SC and Alexandria, VA?

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Weighted Index Numbers

An index can compare the cost of living in one location to another. Consider the following indices City Idaho Falls, ID Aiken, SC Alexandria,VA Cost of Living $60,000 $57,333 Index 90 86 138

How does the cost of living in Idaho Falls, ID compare with Aiken, SC and Alexandria, VA? Aiken, SC = $60,000 * (86/90) = $57,333

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Weighted Index Numbers

An index can compare the cost of living in one location to another. Consider the following indices City Idaho Falls, ID Aiken, SC Alexandria,VA Cost of Living $60,000 $57,333 $92,000 Index 90 86 138

How does the cost of living in Idaho Falls, ID compare 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 group of 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 trend in a series composed of exceptionally large numbers.

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Why Convert Data to Indices?

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 $2,882,500,000 is significant. Yet if the FY 2009 debt is expressed as an 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 was tasked 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

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Escalation

Why should YOU be interested in escalation? You can have the best cost estimate (in constant dollars) but if you do not address escalation properly, your project profile will be erroneous. One not only needs a good database to develop a good estimate, but also appropriate inflation indices to project costs into the future. DOE publishes rates that are to be used for your estimates unless you can provide alternate rates with justification.

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BCI, CCI, and CEPCI Indices

To develop the DOE indices, we looked at three key construction indices which were:

Construction Cost Index (CCI), Building Cost Index (BCI), and

Chemical Engineering Plant Cost Index (CEPCI).

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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
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Composition of CCI
The Construction Cost Index (CCI) comprises a market basket of three commodities plus common labor.
6% 13% Common Labor Steel Lumber Cement 80% 1%

The CCI consists of 80% labor and 20% material

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Composition of BCI
The Building Cost Index (BCI) comprises a market basket of three commodities plus skilled labor.
3% 10% Skilled Labor Steel Lumber Cement

22% 65%

The BCI consists of 65% labor and 35% material

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Composition of CEPCI (2002)

The Chemical Engineering Plant Cost Index (CEPCI) comprises a market basket of eight commodities and two types of skilled labor.

The CEPCI consists of 45% labor and 55% material

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Historical and Predicted Rates

Why is there so much volatility in the CEPCI rates?

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Analysis of the CEPCI

Since there was so much volatility in the CEPCI, we decided to analyze the monthly CEPCI rates going back to 2002. The four major components of the CEPCI are Equipment, Construction Labor, Supervisory Labor, and Buildings. A multiple linear regression of the data with the line forced through the origin revealed the following results:

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Determining CEPCI Percentages

Regression Statistics Multiple R 1.0000 R 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 0.00116012 Total 77 18604651 Bi Intercept Equip C Labor S Labor Buildings Total Equip C Labor S Labor Buildings Total 0 66% 19% 9% 5% 0.9853 66.6% 19.1% 9.1% 5.2% 1.000 Sbi 0.0002 0.0008 0.0006 0.0006 t Stat 2,687.0809 248.8889 160.8510 83.3028 P-value Lower 95%Upper 95% 4.4E-184 1.1E-108 7.36E-95 4.06E-74 0.6559 0.1868 0.0885 0.0497 0.6568 0.1898 0.0907 0.0522

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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% Structural supports Buildings Construction Labor Equipment Engineering Supervision

Note the high variability of structural supports and equipment in the CEPCI.
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n0 Ju 7 lAu 07 gSe 07 p0 O 7 ct N 07 ov D 07 ec Ja 07 nFe 08 bM 08 ar -0 Ap 8 rM 08 ay Ju 0 8 n0 Ju 8 lAu 08 gSe 08 p0 O 8 ct N 08 ov D 08 ec Ja 08 nFe 09 bM 09 ar -0 Ap 9 rM 09 ay -0 9

Ju

Revised CEPCI Percentages

5% 9%
Equipment Construction Labor

19% 67%

Supervisory Labor Buildings

The Regression showed the CEPCI to be 28% labor and 72% material. The large material component explains the increased variability of the CEPCI. The next chart shows what was developed to determine the DOE indices.
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Derivation of DOE Indices

Index BCI CCI CEPC I

Nuclear 15% 10% 75%

Scientific Laboratory 33.3% 33.3% 33.3%

Admin Warehouse 50% 50%

Remediation D&D

100%

BCI: Building Cost Index CCI: Construction Cost Index CEPCI: Chemical Engineering Plant Cost Index
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DOE Escalation Rates

DOE Office of Cost Analysis (CF-70) annually provides escalation rate assumptions for DOE projects

Used for the FY 2011 Congressional Budget Call. Also to be used for Project analyses
Nuclear FY
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Rate
-3.2 -1.9 2.0 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9

Index
1.000 0.981 1.000 1.019 1.038 1.058 1.078 1.099 1.119 1.141 1.162 1.184

Scientific Laboratory Rate Index

0.9 -0.3 2.3 2.2 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 0.981 0.977 1.000 1.022 1.046 1.071 1.097 1.123 1.150 1.178 1.206 1.235

Admin/ Warehouse Rate Index

4.2 0.9 2.6 2.4 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 0.966 0.974 1.000 1.024 1.052 1.082 1.112 1.143 1.175 1.208 1.242 1.277

Remediation/ D&D Rate Index

4.7 0.9 2.9 2.4 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 0.963 0.972 1.000 1.024 1.053 1.083 1.113 1.144 1.176 1.209 1.243 1.278

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Fundamentals of DOE Cost Estimating

22-26 March 2010

Historical DOE Escalation Rates

Final 4QFY09 Escalation Rates (Nov 27, 2009) Nuclear FY 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Rate 1.2 0.9 0.0 2.0 3.0 2.7 1.0 1.9 0.5 1.2 1.0 0.1 1.8 1.0 12.7 2.1 8.1 3.1 7.0 -3.2 Index 0.635 0.640 0.640 0.653 0.672 0.691 0.697 0.711 0.714 0.723 0.730 0.731 0.745 0.752 0.848 0.866 0.936 0.965 1.033 1.000 Scientific Laboratory Rate 2.0 1.9 1.9 3.5 3.3 1.4 2.6 2.8 1.1 2.0 1.2 1.3 2.1 1.6 10.8 2.8 5.3 3.4 5.0 0.9 Index 0.573 0.584 0.595 0.616 0.636 0.645 0.662 0.681 0.688 0.702 0.710 0.719 0.734 0.746 0.827 0.850 0.895 0.925 0.972 0.981 Admin/ Warehouse Rate 2.6 2.6 3.5 4.8 3.5 0.4 4.0 3.5 1.5 2.7 1.3 2.2 2.4 2.0 9.3 3.4 3.0 3.7 3.5 4.2 Index 0.531 0.544 0.563 0.590 0.611 0.613 0.637 0.660 0.670 0.688 0.696 0.712 0.728 0.743 0.812 0.839 0.865 0.897 0.927 0.966 Remediation/ D&D Rate 2.5 3.4 3.1 4.2 3.5 1.0 3.5 3.0 1.9 2.8 1.6 2.7 3.1 2.3 8.3 3.3 3.0 3.7 3.3 4.7 Index 0.523 0.541 0.558 0.581 0.601 0.607 0.629 0.647 0.660 0.678 0.689 0.707 0.729 0.746 0.807 0.834 0.859 0.891 0.920 0.963

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Escalation Rate Example

Lets do a simple example of using escalation rates. Using the nuclear index convert $100M in FY1998 dollars to FY2008 dollars.

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Escalation Rate Example

Lets do a simple example of using escalation rates. 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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Escalation Rate Example

Lets do a more complicated example using escalation rates. We want to determine a cost estimating relationship (CER) to predict the cost in $FY09 of radiation detector Sites and Devices in Eastern Europe and Russia.

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Database used for Radiation Detectors

Fiscal Year FY07 FY07 FY08 FY06 FY07 FY04 FY08 FY08 FY03 FY04 FY05 FY06 FY07 FY08 FY08 FY07 Country Armenia Azerbaijan Estonia Georgia Georgia Greece Kazakhstan Lithuania Russia Russia Russia Russia Russia Russia Slovak Republic Ukraine Escalation Actual Costs Rate Index 1,792,931 0.944 4,100,088 0.944 778,168 0.991 3,018,110 0.912 4,821,530 0.944 7,866,000 0.843 8,214,631 0.991 1,678,634 0.991 10,940,228 0.761 10,036,000 0.843 10,396,578 0.867 11,990,344 0.912 16,617,441 0.944 22,133,070 0.991 650,676 0.991 3,993,737 0.944 Adjusted to FY 2009$ 1,899,291 4,343,314 785,235 3,309,331 5,107,553 9,330,961 8,289,234 1,693,879 14,376,121 11,905,101 11,991,439 13,147,307 17,603,221 22,334,077 656,585 4,230,654 Sites 4 6 2 2 6 4 8 3 19 20 19 10 29 43 5 5 185 RPM Quantities 16 14 3 7 30 52 27 17 113 174 35 123 92 94 10 17 824

Dividing the actual costs by the Scientific Escalation Rate Indices provided FY 2009 constant dollars.
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Regression on Actual/Current Dollars

Regression Statistics Multiple R 0.9717 R Square 0.9442 = RegSS/Total SS Adjusted R Square 0.8688 Standard Error 2,395,136 Observations 16 ANOVA Regression Residual Total SS 1.3595E+15 8.0313E+13 1.4398E+15 df 2 14 16 MS 6.79749E+14 5.73668E+12 F 118.49 Sig F 0.00

Intercept Sites RPM Quantities

Coefficients Standard Error 0 #N/A 457,484 65,414 30,033 14,691

t Stat #N/A 6.99 2.04

P-value Lower 95% Upper 95% #N/A #N/A #N/A 0.00 317,186 597,782 0.06 (1,476) 61,541

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?
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Regression on FY09 Constant Dollars

Regression Statistics Multiple R 0.9729 R Square 0.9465 = RegSS/Total SS Adjusted R Square 0.8713 Standard Error 2,556,727 Observations 16 ANOVA Regression Residual Total SS 1.61932E+15 9.15159E+13 1.71084E+15 Coefficients Intercept Sites RPM Quantities df 2 14 16 MS 8.0966E+14 6.5369E+12 F 123.86 Sig F 0.00

Standard Error 0 #N/A 447,682 69,827 45,459 15,682

t Stat #N/A 6.41 2.90

P-value #N/A 0.00 0.01

Lower 95% #N/A 297,919 11,825

Upper 95% #N/A 597,446 79,094

Note: The adjusted coefficient of determination (R2) is about the same as the previous example; however, both variables are now significant. How can one tell?
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Weakness of the Indices

The BCI and CCI are unweighted indices of 20 locations. The indices 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 September Cum. Average CCI September Cum Average CEPCI September Cum Average FY 2008 4827 4619 XXXXXXXX 8557 8181 XXXXXXXX 608.9 564.7 FY 2009 4764 4785 XXXXXXXX 8586 8566 XXXXXXXX 525.6 532.8 % Change -1.3% 3.6% XXXXXXXX 0.3% 4.7% XXXXXXXX -13.7% -5.6%

The CEPCI Change for Sept 09/Sept 08 was -13.7%. This led us 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 disagree with dividing the averaging cumulative indices.

The idea of an annual deflator is to characterize the price of something in year n, compared to the price of the same thing in year n-1. If the reference 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 December of 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 do not adjust for the seasonality of buying then you overweight and underweight particular months. -- Dr. David C. Trybula, Ph.D Economics
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Rationale for Cum Average Indices

As we discussed on the phone, utilizing annual PPIs or monthly PPIs 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

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Inflation and Escalation

Inflation is defined as a rise in the general level of prices and goods and services in an economy over period of time. It is an external economic effect. Escalation is adjusting constant dollars to current/then year 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 the same 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.

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Escalation and De-escalation

First, Project costs should be estimated in terms of Constant dollars. Second, Project budgets must be assembled in terms of Then-Year dollars 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)
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OMB-Designated Discount Rates, from OMB Circular A-94 (Dec 2009)

5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 3-Year 5-Year 7-Year 10-Year 20-Year 30-Year 0.9% 2.3% 1.9% 1.6% 2.2% Real Rate Nominal Rate 3.5% 3.1% 2.7% 2.7% 4.4% 3.9%

4.5%

Project Duration

What inflation rates does OMB anticipate? Why do these numbers increase over time? What about different durations?
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Escalation Example
Nuclear Example Estimated Constant dollar project cost (FY11$M) DOE-nuclear price index (from table) Then-Year/budget dollars (TY$M) FY 2011 500 1.000 500 FY 2012 FY 2013 FY 2014 1,000 1.019 1,019 2,000 1.038 2,076 250 = $3,750 FY11$M 1.058 265 = $3,860 TY$ M

Start with cost stream estimated in Constant dollars Multiply the constant dollars by the DOE Nuclear index to develop the budget requirements in Then-Year dollars

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De-escalation Example
Scientific Example Then-Year budget dollars ($M) DOE scientific price index (from Table Estimated Constant dollar project cost (FY11$M) FY 2011 FY 2012 FY 2013 FY 2014 600 1.000 1,100 1.022 2,200 1.046 600 = $4,500 TY$M 1.071

600

1,071

2,103

560 = $4,334 FY11$M

Start with cost stream in Then-Year/budget dollars Divide the Then-Year budget dollars by the DOE Scientific index to develop constant dollars.

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Reminders

Use Constant dollars when appropriate and use current/then-year dollars when appropriate

Constant dollars for costing Current/then-year dollars for budgeting 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.

Use the appropriate DOE escalation index

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Discounting Because a (real) dollar today is worth more than a (real) dollar tomorrow

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References

OMB Circular A94:Guidelines and Discount Rates for BenefitCost Analysis of Federal Programs Executive Order 12893:Principles for Federal Infrastructure Investments Benefits and costs should be measured and appropriately discounted 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)

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Discounted Present Value

Compare program alternatives when costs and benefits are distributed over time. Typical applications:

Alternative Analysis Lease-versus-buy analyses

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Mechanics of Discounting
One Year: The present value of an amount (of money) R1 to be received one year in the future where i is the annual rate of interest. is defined as:

R1 PV R1 1 i
Multi-Year: The generalization of the definition of present value to a stream of costs C = Ct , t = 1, 2, 3, , n is:

PV (C ) Ct /(1 i )t
1
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Simple Comparison of Alternatives

Fiscal Year FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 Admin Warhouse 1.000 1.024 1.052 1.082 1.112 1.143 1.175 ALT 1 TY $M FY11 $M NPV 1.9% $M ALT 2 TY $M FY11 $M NPV 1.9% $M 91 91 91 440 430 422 248 236 227 577 548 528 463 428 404 617 570 539 970 872 809 555 499 463 916 801 729 444 388 354 410 349 312 233 198 177 Total 3,007 2,686 2,482 2,957 2,725 2,573

Comparison of Alternatives - Admin/Warehouse Project

1200 1000

ALT 1 TY $M ALT 2 TY $M

Millions in TY$

800 600 400 200 0 FY 2011 FY 2012 FY 2013 FY 2014 Fiscal Year FY 2015 FY 2016 FY 2017

Which alternative is better?

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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.
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Summary

Use of multi-year cost 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

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Use net present value to compare alternatives Use the right discount rate

Example
Using the Nuclear Index fill out the table below
Fiscal Year Nuclear ALT 1 TY $M FY11 $M *NPV 1.6% $M ALT 2 TY $M FY11 $M **NPV 1.9% $M FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 Total NA 2,150

500

500

500

400

250

350

350

400

300

300

300

200

2,200

*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
Using the Nuclear Index to fill out the table below
Fiscal Year Nuclear ALT 1 TY $M FY11 $M *NPV 1.6% $M ALT 2 TY $M FY11 $M **NPV 1.9% $M FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 1.000 1.019 1.038 1.058 1.078 1.099 1.119 500 500 500 350 350 350 500 500 472 350 350 327 500 500 445 400 400 306 400 400 420 300 300 327 250 250 317 300 300 229 300 300 214 200 200 200 Total NA 2,150 1,150 1,182 2,200 2,200 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%

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Discounting of Nominal Dollars Using OMB Circular A-94 Rates

Fiscal Year Nuclear ALT 1 TY $M *NPV 3.1% $M ALT 2 TY $M **NPV 3.5% $M FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 1.000 1.019 1.038 1.058 1.078 1.099 1.119 500 500 350 350 500 485 350 338 500 470 400 373 400 365 300 271 250 221 300 261 300 253 200 163 Total NA 2,150 2,042 2,200 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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Discounting of Nominal Dollars Using OMB Circular A-94 Rates

Fiscal Year Nuclear ALT 1 TY $M *NPV 3.1% $M ALT 2 TY $M **NPV 3.5% $M FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 1.000 1.019 1.038 1.058 1.078 1.099 1.119 500 500 350 350 500 485 350 338 500 470 400 373 400 365 300 271 250 221 300 261 300 253 200 163 Total NA 2,150 2,042 2,200 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 the Nuclear 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 escalation rates? Which of these baskets has recently shown the most variability, and why? In regression analysis how can one tell if the overall regression is significant? In regression analysis how can one tell if the independent variables are significant?

2.

3.

4.

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Questions for Discussion

1.

How have you been using escalation rates in your projects? What suggestions do you have for improving the CF-70 escalation rates in the future? What does the draft DOE O 415.X require?

2.

3.

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