6 Economic Evaluation of Facility Investments
6.1 Project Life Cycle and Economic Feasibility
Facility investment decisions represent major commitments of corporate resources and have serious consequences on the profitability and financial stability of a corporation. In the public sector, such decisions also affect the viability of facility investment programs and the credibility of the agency in charge of the programs. It is important to evaluate facilities rationally with regard to both the economic feasibility of individual projects and the relative net benefits of alternative and mutually exclusive projects.
This chapter will present an overview of the decision process for economic evaluation of facilities with regard to the project life cycle. The cycle begins with the initial conception of the project and continues though planning, design, procurement, construction, start-up, operation and maintenance. It ends with the disposal of a facility when it is no longer productive or useful. Four major aspects of economic evaluation will be examined:
- The basic concepts of facility investment evaluation, including time preference for consumption, opportunity cost, minimum attractive rate of return, cash flows over the planning horizon and profit measures.
- Methods of economic evaluation, including the net present value method, the equivalent uniform annual value method, the benefit-cost ratio method, and the internal rate of return method.
- Factors affecting cash flows, including depreciation and tax effects, price level changes, and treatment of risk and uncertainty.
- Effects of different methods of financing on the selection of projects, including types of financing and risk, public policies on regulation and subsidies, the effects of project financial planning, and the interaction between operational and financial planning.
In setting out the engineering economic analysis methods for facility investments, it is important to emphasize that not all facility impacts can be easily estimated in dollar amounts. For example, firms may choose to minimize environmental impacts of construction or facilities in pursuit of a “triple bottom line:” economic, environmental and social. By reducing environmental impacts, the firm may reap benefits from an improved reputation and a more satisfied workforce. Nevertheless, a rigorous economic evaluation can aid in making decisions for both quantifiable and qualitative facility impacts.
Life Cycle Assessment (LCA) and Life Cycle Impact Analysis (LCIA) are easily confused with the focus of this chapter, which is on project life cycle and economic feasibility. It has become common in recent years for owners, architects and engineers to conduct an LCA of new building, deep renovation, and adaptive reuse projects, in which the embodied energy or carbon, GHG (green house gas) emissions, water usage, life cycle operating energy, and other factors are considered. Alternatives are compared based on these factors. Regula