Generate Alternatives. After the objective statement is defined,
all feasible alternatives should be generated that will meet that objective.
"Undesirable" alternatives should also be considered. They may provide
additional information that can be utilized by the decision-maker.
Formulate Assumptions. The economic process involves estimates of
future expenditures and uncertainty. Thus, assumptions often must be made in
order to analyze various alternatives. Assumptions should be clearly defined
and documented. Thorough documentation requires that all sources be cited.
Determine Costs and Benefits. The determination of costs and
benefits requires collection and analysis of data. Data must be analyzed for
the entire economic life of the proposal. This requires discounting of the
estimated future costs and benefits and a determination of the period of time
to be analyzed. The specific factors limiting the duration of economic life
are as follows (refer to NAVFAC P-442):
a) The mission life, or period over which a need for the asset(s)
b) The physical life, or period over which the asset(s) may be
expected to last physically;
c) The technological life, or period before obsolescence would
dictate replacement of the existing (or prospective) asset(s).
The economic life is defined as the period of time during which a proposal
provides a positive benefit to the Navy (refer to NAVFAC P-442). Although the
physical life of an asset may be quite long, the mission or technological life
is constrained to a shorter period of time (25 years maximum). Anticipated
need of an asset and possible obsolescence are difficult to predict. The
economic life is determined to be the least of the mission life, physical
life, and technological life. The method of discounting, used to determine
the present value of costs and benefits, also suggests that 25 years be the
maximum economic life. Refer to Appendix B for economic life guidelines.
Costs. Cost estimates place a dollar value on materials, labor,
maintenance, and acquisition of a proposed alternative. Discounting of these
values allows life cycle costing of that alternative. To compute present
values, a 10 percent discount rate is assumed and is used for most Government
investments. This discount rate accounts for the general inflation rate
(refer to NAVFAC P-442). See Appendixes C and D for project year discount
factors and present value formulae. Life cycle cost in an economic analysis
is the total cost to the Government of acquisition of ownership of an
alternative over its full life (refer to NAVFAC P-442). One caveat, sunk
costs that have occurred before the decision point (time of analysis), are not
to be considered. These include costs that have already been spent, such as
research and development and previous acquisition of an asset.
a) One-time costs are costs that occur at one point in time or at
different values over an extended period of time (economic life). Examples
are acquisition costs, research and development (after the decision point),
and terminal or salvage value of asset at the end of its economic life.
Recurring annual costs are costs that occur annually over an extended period
of time (economic life). Examples are personnel costs, operating costs, and