construction and refurbishment of earthen irrigation channel banks

in some cases to compare all the options over a 100-year period, where thediscounted residual value becomes almost insignificant.The evaluation period is divided into time intervals, usually in increments of a year.13.4.4 Choose an Analysis TechniqueThe analysis technique used should be a standard discounted cash flow, which takesinto consideration the time value of money. Discounted cash flow analysis is amethod of valuing and therefore comparing a range of different cash flows. Thediscounted cash flow analysis results in estimates of the present value of the sum ofinitial and future costs over the selected evaluation period. The analysis requiresthat all future costs are quantified and identified with a time period, and thenadjusted to current year dollars to enable comparison.Cash inflows and cash outflows represent benefits and costs, and the present valueof all the inflows and outflows is the Net Present Value. In life-cycle analysis, thecash inflows or benefits are not included and the present value of costs representsthe cash outflows only. The option with the lowest present value for an equalevaluation period is considered the most appropriate option economically.Further details of the economic theory of present and future values should be soughtfrom appropriate texts on the subject.Two well known methods used in the water industry for project evaluation arePresent Value (PVC), for comparing items with similar life expectancies, andEquivalent Annual Cost (EAC) for assets with dissimilar life expectancies.Analysis by PVC - PVC is considered the most comprehensive and effectivemethod. It converts all future cash amounts into current-year dollars using aappropriate discount rate. Once this is done a comparison of the options can bemade as long as the life spans are the same.Analysis by EAC - Items with different life spans can be compared using EAC. TheEAC is the PVC averaged over the expected life of each option to give anequivalent annual value. One advantage of using annual equivalents is that costscan be discussed using much smaller and manageable numbers than would be thecase if present values were used.However, the economic validity of an option is not established by these analyses.They distinguish the least cost option. Economic validity can only be establishedby considering the benefits and costs of an option.To identify and better understand the costs associated with an asset, it is a goodpractice to present the analysis in a spreadsheet format, identifying all the costelements in the rows or alternatively the columns. The costs associated with theelements can be entered for each year in the relevant columns or rows.Life cycle cost analysis can require a volume of data and degree of precision, whichis difficult to manage using manual means. For large, complex projects, a manualapproach to analysis is simply not practical and a software-based model is required.Spreadsheet programs such as Excel, Quattro Pro and Lotus have NPV as functionsthat can be used to simplify the process.Construction and Refurbishment of Earthen Channel Banks August 2002 - Edition 1.0 13-11