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ASTM E1057-06

(Practice)

Standard Practice for Measuring Internal Rate of Return and Adjusted Internal Rate of Return for Investments in Buildings and Building Systems

Standard Practice for Measuring Internal Rate of Return and Adjusted Internal Rate of Return for Investments in Buildings and Building Systems

SCOPE
1.1 This practice establishes a procedure for calculating and interpreting the IRR and AIRR measures in the evaluation of building designs, systems, and equipment.

General Information

Status
Historical
Publication Date
31-Mar-2006
ICS
91.010.20 - Contractual aspects
Technical Committee
E06 - Performance of Buildings
Drafting Committee
E06.81 - Building Economics
Current Stage
Ref Project

Relations

Replaces
ASTM E1057-04 - Standard Practice for Measuring Internal Rate of Return and Adjusted Internal Rate of Return for Investments in Buildings and Building Systems
Effective Date
01-Apr-2006
Replaced By
ASTM E1057-06e1 - Standard Practice for Measuring Internal Rate of Return and Adjusted Internal Rate of Return for Investments in Buildings and Building Systems
Effective Date
01-Apr-2006
Referred By
ASTM E3200-21 - Standard Guide for Investment Analysis in Environmentally Sustainable Manufacturing
Effective Date
01-Apr-2006
Referred By
ASTM E2103/E2103M-19 - Standard Classification for Bridge Elements—UNIFORMAT II
Effective Date
01-Apr-2006
Referred By
ASTM E1121-15(2020)e1 - Standard Practice for Measuring Payback for Investments in Buildings and Building Systems
Effective Date
01-Apr-2006
Referred By
ASTM E1765-16(2023) - Standard Practice for Applying Analytical Hierarchy Process (AHP) to Multiattribute Decision Analysis of Investments Related to Projects, Products, and Processes
Effective Date
01-Apr-2006
Referred By
ASTM E1185-15(2020)e1 - Standard Guide for Selecting Economic Methods for Evaluating Investments in Buildings and Building Systems
Effective Date
01-Apr-2006
Referred By
ASTM E3008/E3008M-16(2023) - Standard Classification for Transportation Surface Elements—UNIFORMAT II
Effective Date
01-Apr-2006
Referred By
ASTM E1074-15(2020)e1 - Standard Practice for Measuring Net Benefits and Net Savings for Investments in Buildings and Building Systems
Effective Date
01-Apr-2006
Referred By
ASTM E2506-15(2020)e1 - Standard Guide for Developing a Cost-Effective Risk Mitigation Plan for New and Existing Constructed Facilities
Effective Date
01-Apr-2006
Referred By
ASTM E3130-21 - Standard Guide for Developing Cost-Effective Community Resilience Strategies
Effective Date
01-Apr-2006
Referred By
ASTM E917-17(2023) - Standard Practice for Measuring Life-Cycle Costs of Buildings and Building Systems
Effective Date
01-Apr-2006
Referred By
ASTM E1557-09(2020)e1 - Standard Classification for Building Elements and Related Sitework—UNIFORMAT II
Effective Date
01-Apr-2006
Referred By
ASTM E2204-15(2020)e1 - Standard Guide for Summarizing the Economic Impacts of Building-Related Projects
Effective Date
01-Apr-2006
Referred By
ASTM E1369-15(2020)e1 - Standard Guide for Selecting Techniques for Treating Uncertainty and Risk in the Economic Evaluation of Buildings and Building Systems
Effective Date
01-Apr-2006

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ASTM E1057-06 - Standard Practice for Measuring Internal Rate of Return and Adjusted Internal Rate of Return for Investments in Buildings and Building SystemsASTM E1057-06 - Standard Practice for Measuring Internal Rate of Return and Adjusted Internal Rate of Return for Investments in Buildings and Building Systems
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ASTM E1057-06 - Standard Practice for Measuring Internal Rate of Return and Adjusted Internal Rate of Return for Investments in Buildings and Building Systems
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NOTICE: This standard has either been superseded and replaced by a new version or withdrawn.
Contact ASTM International (www.astm.org) for the latest information
Designation:E1057–06
Standard Practice for
Measuring Internal Rate of Return and Adjusted Internal
Rate of Return for Investments in Buildings and Building
1
Systems
This standard is issued under the fixed designation E1057; the number immediately following the designation indicates the year of
original adoption or, in the case of revision, the year of last revision.Anumber in parentheses indicates the year of last reapproval.A
superscript epsilon (e) indicates an editorial change since the last revision or reapproval.
INTRODUCTION
The internal rate-of-return (IRR) and adjusted internal rate-of-return (AIRR) methods are members
of a family of economic evaluation methods that provide measures of economic performance of an
investmentovertime.Othermethodsinthisfamilyofevaluationmethodsarelife-cyclecostanalysis,
net benefits and net savings analysis, benefit-to-cost and savings-to-investment ratio analysis, and
payback analysis.
The IRR andAIRR methods are the topic of a single standard practice because they both measure
economic performance as a compound yield on investment.The IRR is the compound rate of interest
that,whenappliedasadiscountratetoaproject’sstreamofdollarbenefitsandcosts,willequatethem.
The AIRR is the overall yield taking into account earnings on receipts reinvested to the end of the
study period.The IRR orAIRR is compared against the investor’s minimum acceptable rate of return
(MARR), and the investment is considered economically attractive if the calculated yield exceeds the
MARR. If an investment entails an initial outlay and a single receipt at the end of the study period,
there is no difference between the IRR and the AIRR. But if cash flows occur over multiple time
periods, the two will normally be different. This arises because theAIRR includes in its measure the
return on reinvestment of receipts, whereas the IRR does not.
The AIRR is recommended for most applications in which a measure of yield is desired. Caution
is recommended in applying either measure, however, because problems arise under certain
conditions.
1. Scope and Building Systems
E964 Practice for Measuring Benefit-to-Cost and Savings-
1.1 This practice covers a procedure for calculating and
to-Investment Ratios for Buildings and Building Systems
interpreting the internal rate of return (IRR) and adjusted
E1074 Practice for Measuring Net Benefits and Net Sav-
internal rate of return (AIRR) measures in the evaluation of
ings for Investments in Buildings and Building Systems
building designs, systems, and equipment.
E1121 Practice for Measuring Payback for Investments in
2. Referenced Documents
Buildings and Building Systems
2
E1185 Guide for Selecting Economic Methods for Evalu-
2.1 ASTM Standards:
ating Investments in Buildings and Building Systems
E631 Terminology of Building Constructions
E1369 Guide for Selecting Techniques for Treating Uncer-
E833 Terminology of Building Economics
tainty and Risk in the Economic Evaluation of Buildings
E917 PracticeforMeasuringLife-CycleCostsofBuildings
and Building Systems
E1765 Practice forApplyingAnalytical Hierarchy Process
(AHP) to Multiattribute Decision Analysis of Investments
1
This practice is under the jurisdiction of ASTM Committee E06 on Perfor-
Related to Buildings and Building Systems
mance of Buildings and is the direct responsibility of Subcommittee E06.81 on
E1946 Practice for Measuring Cost Risk of Buildings and
Building Economics.
Building Systems
Current edition approved April 1, 2006. Published April 2006. Originally
approved in 1985. Last previous edition approved in 2004 as E1057–04.
E2204 Guide for Summarizing the Economic Impacts of
2
For referenced ASTM standards, visit the ASTM website, www.astm.org, or
Building-Related Projects
contact ASTM Customer Service at service@astm.org. For Annual Book of ASTM
Standards volume information, refer to the standard’s Document Summary page on
the ASTM website.
Copyright © ASTM International, 100 Barr Harbor Drive, PO Box C700, West Conshohocken, PA 19428-2959, United States.
1

---------------------- Page: 1 ----------------------
E1057–06
2.2 ASTM Adjuncts: concerntothedecisionmaker.However,ithasdeficienciesthat
Discount Factor Tables, Adjunct to Practices E917, E964, limit its usefulness in choosing among projects competing for
3
E1057, E1074, and E1121 a limited budget.
5.2 The AIRR method is a measure of the overall rate of
3. Terminology
return that an investor can expect from an investment over a
3.1 Definitions—For definitions of terms used in this prac- designated study period. It is appropriate both for evaluating
whether a given building or building system will be economi-
tice, refer to Terminologies E631 and E833.
cally efficient and for choosing among alternatives competing
4. Summary of Practice
for a limited budget.
4.1 This practice is organized as fo
...

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SIGNIFICANCE AND USE
5.1 LCC analysis is an economic method for evaluating a project or project alternatives over a designated study period. The method entails computing the LCC for alternative building designs or system specifications having the same purpose and then comparing them to determine which has the lowest LCC over the study period.  
5.2 The LCC method is particularly suitable for determining whether the higher initial cost of a building or building system is economically justified by reductions in future costs (for example, operating, maintenance, repair, or replacement costs) when compared with an alternative that has a lower initial cost but higher future costs. If a building design or system specification has both a lower initial cost and lower future costs relative to an alternative, an LCC analysis is not needed to show that the former is the economically preferable choice.  
5.3 If an investment project is not essential to the building operation (for example, replacement of existing single-pane windows with new double-pane windows), the project must be compared against the “do nothing” alternative (that is, keeping the single pane windows) in order to determine if it is cost effective. Typically the “do nothing” alternative entails no initial investment cost but has higher future costs than the proposed project.
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1.1 This practice establishes a procedure for evaluating the life-cycle cost (LCC) of a building or building system and comparing the LCCs of alternative building designs or systems that satisfy the same functional requirements.  
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1.4 The values stated in inch-pound units are to be regarded as standard. The values given in parentheses are mathematical conversions to SI units that are provided for information only and are not considered standard.  
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SIGNIFICANCE AND USE
4.1 When preparing construction, project, and program cost estimates, it is often necessary to make monetary provision for change or risk, or both, or other exigencies where information is incomplete.  
4.2 Such allowance, contingency or reserve sums are employed by many persons engaged in the planning, delivery, and financing of construction work.  
4.3 These users include owners, developers, facilities programmers, cost planners, estimators, schedules, architects and engineers, specification writers, operating and maintenance staff, manufacturers, educators, financial managers, and comptrollers.  
4.4 Usage:  
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Cost budgeting;  
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4.4.3 Such sums may be general or specific in scope, may be planned to be spent or may only be included as possible mitigation for unplanned events and requirements.  
4.4.4 To distinguish between these sums, and in recognition of their differing purpose, they are described, and classified here, using the terms allowance, contingency, or reserve.
Note 1: Section 5 includes a generic statement of purpose for each of the three terms and provides a sub-classification that distinguishes between sums included for specific purposes and for non-specific, that is, general purposes. In cost budgeting, conceptual and design estimating especially, an estimator may intuitively recognize...
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1.1 This classification establishes a classification for allowance, contingency, and reserve sums used in construction, project, and program estimating.  
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ASTM E1946-18(2023)(Practice)
Standard Practice for Measuring Cost Risk of Buildings and Building Systems and Other Constructed Projects

SIGNIFICANCE AND USE
5.1 Measuring cost risk enables owners of buildings and other constructed projects, architects, engineers, and contractors to measure and evaluate the cost risk exposures of their construction projects.3 Specifically, cost risk analysis (CRA) helps answer the following questions:  
5.1.1 What are the probabilities for the construction contract to be bid above or below the estimated value?  
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SCOPE
1.1 This practice covers a procedure for measuring cost risk for buildings and building systems and other constructed projects, using the Monte Carlo simulation technique as described in Guide E1369.  
1.2 A computer program is required for the Monte Carlo simulation. This can be one of the commercially available software programs for cost risk analysis, or one constructed by the user.  
1.3 This standard does not purport to address all of the safety concerns, if any, associated with its use. It is the responsibility of the user of this standard to establish appropriate safety, health, and environmental practices and determine the applicability of regulatory limitations prior to use.  
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SIGNIFICANCE AND USE
5.1 Investments in long-lived projects such as buildings are characterized by uncertainties regarding project life, operation and maintenance costs, revenues, and other factors that affect project economics. Since future values of these variable factors are generally not known, it is difficult to make reliable economic evaluations.  
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5.4 Uncertainty and risk are defined as follows. Uncertainty (or certainty) refers to a state of knowledge about the variable inputs to an economic analysis. If the decision-maker is unsure of input values, there is uncertainty. If the decision-maker is sure, there is certainty. Risk refers either to risk exposure or risk attitude.  
5.4.1 Risk exposure is the probability of investing in a project that will have a less favorable economic outcome than what is desired (the target) or is expected.  
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1.1 This guide covers techniques for treating uncertainty in input values to an economic analysis of a building investment project. It also recommends techniques for evaluating the risk that a project will have a less favorable economic outcome than what is desired or expected.2  
1.2 The techniques include breakeven analysis, sensitivity analysis, risk-adjusted discounting, the mean-variance criterion and coefficient of variation, decision analysis, simulation, and stochastic dominance.  
1.3 The techniques can be used with economic methods that measure economic performance, such as life-cycle cost analysis, net benefits, the benefit-to-cost ratio, internal rate of return, and payback.  
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5.1 The IRR method has been used traditionally in finance and economics to measure the percentage yield on investment.  
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4.1 Standard practices for measuring the economic performance of investments in buildings and building systems have been published by ASTM. A computer program that produces economic measures consistent with these practices is available.4 Discount Factor Tables has been published by ASTM to facilitate computing measures of performance for most of the practices.  
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1.1 This guide identifies types of building design and building system decisions that require economic analysis and recommends ASTM practices, adjuncts, and computer programs that may be used to implement the appropriate economic methods for each decision type.  
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Standard Practice for Measuring Net Benefits and Net Savings for Investments in Buildings and Building Systems

SIGNIFICANCE AND USE
5.1 The NB (NS) method provides a measure of the economic performance of an investment, taking into account all relevant monetary values associated with that investment over the investor’s study period. The NB (NS) measure can be expressed in either present value or equivalent annual value terms, taking into account the time value of money.  
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SIGNIFICANCE AND USE
4.1 Program and project estimates are a necessary part of planning and implementing any program of work.  
4.2 These estimates are used by persons involved in the planning and management of programs and projects. They are an essential part of establishing initial budgets and provide a framework for continuing updates permitting cost control through the life of a program and its various projects.  
4.3 Users include owners, developers, facilities programmers, financial managers, company controllers, executives, program managers, project managers, and specialist cost planners including life cycle cost analysts.  
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Standard Practice for Measuring Benefit-to-Cost and Savings-to-Investment Ratios for Buildings and Building Systems

SIGNIFICANCE AND USE
5.1 The BCR and SIR provide measures of economic performance in a single number that indicates whether a proposed building or building system is preferred over a mutually exclusive alternative that serves as the base for computing the ratio. It may be contrasted with the life-cycle cost (LCC) method that requires two LCC measures to evaluate the economic performance of a building or building system—one for each alternative.  
5.2 The ratio indicates discounted dollar benefits (or savings) per dollar of discounted costs.  
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5.4 The BCR or SIR computed on increments of benefits (or savings) and costs can be used to determine if one design or size of a building or system is more economic than another.  
5.5 The BCR or SIR can be used as an aid to select the economically efficient set of projects among many competing for limited funding. The efficient set of projects will maximize aggregate net benefits or net savings obtainable for the budget.
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1.1 This practice covers a procedure for calculating and interpreting benefit-to-cost ratios (BCR) and savings-to-investment ratios (SIR) as an aid for making building-related decisions.  
1.2 A basic premise of the BCR and SIR methods is that future as well as present benefits and costs arising from a decision are important to that decision, and, if measurable in dollars, should be included in calculating the BCR and SIR.  
1.3 Dollar amounts used to calculate BCR and SIR are all discounted, that is, expressed in time-equivalent dollars, either in present value or uniform annual value terms.  
1.4 The values stated in inch-pound units are to be regarded as standard. The values given in parentheses are mathematical conversions to SI units that are provided for information only and are not considered standard.  
1.5 This standard does not purport to address all of the safety concerns, if any, associated with its use. It is the responsibility of the user of this standard to establish appropriate safety, health, and environmental practices and determine the applicability of regulatory limitations prior to use.  
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Standard Practice for Measuring Life-Cycle Costs of Buildings and Building Systems

SIGNIFICANCE AND USE
5.1 LCC analysis is an economic method for evaluating a project or project alternatives over a designated study period. The method entails computing the LCC for alternative building designs or system specifications having the same purpose and then comparing them to determine which has the lowest LCC over the study period.  
5.2 The LCC method is particularly suitable for determining whether the higher initial cost of a building or building system is economically justified by reductions in future costs (for example, operating, maintenance, repair, or replacement costs) when compared with an alternative that has a lower initial cost but higher future costs. If a building design or system specification has both a lower initial cost and lower future costs relative to an alternative, an LCC analysis is not needed to show that the former is the economically preferable choice.  
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