ASTM E1074-15(2020)e1

This international standard was developed in accordance with internationally recognized principles on standardization established in the Decision on Principles for the
Development of International Standards, Guides and Recommendations issued by the World Trade Organization Technical Barriers to Trade (TBT) Committee.
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Designation:E1074 −15 (Reapproved 2020)
Standard Practice for
Measuring Net Benefits and Net Savings for Investments in
Buildings and Building Systems
This standard is issued under the fixed designation E1074; the number immediately following the designation indicates the year of
original adoption or, in the case of revision, the year of last revision. A number in parentheses indicates the year of last reapproval. A
superscript epsilon (´) indicates an editorial change since the last revision or reapproval.
ε NOTE—Adjunct title and stock number in 2.2 were updated editorially in April 2020.
INTRODUCTION
The net benefits (NB) and net savings (NS) methods are part of a family of economic evaluation
methods that provide measures of economic performance of an investment over some period of time.
Included in this family of evaluation methods are life-cycle cost analysis, benefit-to-cost and
savings-to-investment ratios, internal rates of return, and payback analysis.
The NB method calculates the difference between discounted benefits and discounted costs as a
measure of the cost effectiveness of a project. The NS method calculates the difference between
life-cycle costs as a measure of the cost-effectiveness of a project. The NB and NS methods are
sometimescalledthenetpresentvaluemethod.TheNBandNSmethodsareusedtodecideifaproject
is cost effective (net benefits greater than zero, or net savings greater than zero), or which size, or
design, competing for a given purpose is most cost effective (the one with the greatest net benefits, or
the one with the greatest net savings).
1. Scope 2. Referenced Documents
1.1 This practice covers a recommended procedure for 2.1 ASTM Standards:
calculating and interpreting the net benefits (NB) and net E631 Terminology of Building Constructions
savings(NS)methodsintheevaluationofbuildingdesignsand E833 Terminology of Building Economics
systems. E917 Practice for Measuring Life-Cycle Costs of Buildings
and Building Systems
1.2 The values stated in inch-pound units are to be regarded
E964 Practice for Measuring Benefit-to-Cost and Savings-
as standard. The values given in parentheses are mathematical
to-Investment Ratios for Buildings and Building Systems
conversions to SI units that are provided for information only
E1057 Practice for Measuring Internal Rate of Return and
and are not considered standard.
Adjusted Internal Rate of Return for Investments in
1.3 This standard does not purport to address all of the
Buildings and Building Systems
safety concerns, if any, associated with its use. It is the
E1121 Practice for Measuring Payback for Investments in
responsibility of the user of this standard to establish appro-
Buildings and Building Systems
priate safety, health, and environmental practices and deter-
E1185 Guide for Selecting Economic Methods for Evaluat-
mine the applicability of regulatory limitations prior to use.
ing Investments in Buildings and Building Systems
1.4 This international standard was developed in accor-
E1369 Guide for Selecting Techniques for Treating Uncer-
dance with internationally recognized principles on standard-
tainty and Risk in the Economic Evaluation of Buildings
ization established in the Decision on Principles for the
and Building Systems
Development of International Standards, Guides and Recom-
E1765 Practice for Applying Analytical Hierarchy Process
mendations issued by the World Trade Organization Technical
(AHP) to Multiattribute DecisionAnalysis of Investments
Barriers to Trade (TBT) Committee.
Related to Projects, Products, and Processes
E1946 Practice for Measuring Cost Risk of Buildings and
This practice is under the jurisdiction of ASTM Committee E06 on Perfor-
mance of Buildings and is the direct responsibility of Subcommittee E06.81 on
Building Economics. For referenced ASTM standards, visit the ASTM website, www.astm.org, or
Current edition approved April 1, 2020. Published May 2020. Originally contact ASTM Customer Service at service@astm.org. For Annual Book of ASTM
approved in 1985. Last previous edition approved in 2015 as E1074-15. DOI: Standards volume information, refer to the standard’s Document Summary page on
10.1520/E1074-15R20E01. the ASTM website.
Copyright © ASTM International, 100 Barr Harbor Drive, PO Box C700, West Conshohocken, PA 19428-2959. United States
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Building Systems and Other Constructed Projects 6. Procedures
E2204 Guide for Summarizing the Economic Impacts of
6.1 The recommended steps for applying the NB (NS)
Building-Related Projects
method to an investment decision are summarized as follows:
2.2 ASTM Adjunct:
6.1.1 Make sure that the NB (NS) method is the appropriate
Discount Factor Tables - Adjunct to E917 Practice for
economic measure (see Guide E1185);
Measuring Life-Cycle Costs of Buildings and Building
6.1.2 Identify objectives, alternatives, and constraints;
Systems - Includes Excel and PDF Files
6.1.3 Establish assumptions;
6.1.4 Compile data;
3. Terminology
6.1.5 Convert cash flows to a common time basis (discount-
3.1 Definitions—For definitions of general terms related to
ing);
building construction used in this practice, refer to Terminol-
6.1.6 Compute NB (NS) and compare alternatives; and
ogy E631; and for general terms related to building economics,
6.1.7 Make final decision, based on NB (NS) results as well
refer to Terminology E833.
as consideration of risk and uncertainty, unquantifiable effects,
and funding constraints (if any).
4. Summary of Practice
6.2 Since the steps mentioned in 6.1.2 – 6.1.5 are treated in
4.1 This practice is organized as follows:
detail in Practice E917 and briefly in Practices E964 and
4.1.1 Section 2, Referenced Documents—Lists ASTM stan-
E1121, they are not discussed in this practice. In calculating
dards referenced in this practice.
NB (NS), these four steps should be followed exactly as
4.1.2 Section 3, Definitions—Addresses definitions of terms
described in Practice E917. The remainder of this practice
used in this practice.
focuses on the computation, analysis, and application of the
4.1.3 Section 4, Summary of Practice—Outlines the con-
NB (NS) measure. A comprehensive example of the NB
tents of the practice.
methodappliedtoabuildingeconomicsproblemisprovidedin
4.1.4 Section 5, Significance and Use—Explains the appli-
Appendix X1. A comprehensive example of the NS method
cation of the practice and how and when it should be used.
applied to a building economics problem is provided in
4.1.5 Section 6, Procedures—Summarizes the steps in mak-
Appendix X2.
ing NB (NS) analysis.
4.1.6 Section 7, Compute NB (NS)—Describes calculation 7. NB (NS) Computation
procedures for NB (NS).
7.1 Computation of NB for any given project requires the
4.1.7 Section 8, Anaylsis of NB (NS) Results and the
estimation,indollarterms,ofdifferencesbetweenbenefits,and
Decision—Discussesthedecisioncriterionandthetreatmentof
differencesbetweencosts,forthatprojectrelativetoamutually
uncertainty, risk, and unqualified effects.
exclusive alternative. Computation of NS for any given project
4.1.8 Section 9, Applications—Explains circumstances un-
requires the estimation, in dollar terms, of the difference
der which the NB (NS) method is appropriate.
between life-cycle costs for the project relative to a mutually
4.1.9 Section 10, Report—Identifies information that should
exclusive alternative. The mutually exclusive alternative may
be included in a report of a NB (NS) analysis.
be a similar design/system of a different scale, a dissimilar
design/system for the same purpose, or the do nothing case.
5. Significance and Use
Denote the alternative under consideration as A and the
j
5.1 The NB (NS) method provides a measure of the eco-
mutually exclusive alternative to be used for purposes of
nomic performance of an investment, taking into account all
comparison as A . Alternative A is typically the do nothing
k k
relevant monetary values associated with that investment over
case or the project with the lowest first cost, which may or may
the investor’s study period. The NB (NS) measure can be
not be the same project. But the analyst can choose any of the
expressed in either present value or equivalent annual value
mutually exclusive alternatives as the base case against which
terms, taking into account the time value of money.
to compare alternatives. Benefits can include (but are not
5.2 The NB (NS) method is used to decide if a given project
limited to) revenue, productivity, functionality, durability, re-
is cost effective and which size or design for a given purpose sale value, and tax advantages. Costs can include (but are not
is most cost effective when no budget constraint exists. limited to) initial investment, operation and maintenance (in-
cluding energy consumption), repair and replacements, and tax
5.3 The NB (NS) method can also be used to determine the
liabilities.
most cost effective combination of projects for a limited
budget; that is, the combination of projects having the greatest 7.2 Eq 1 is used to compute the present value of net benefits
aggregate NB (NS) and fitting within the budget constraint. (PVNB ) for the proposed project relative to its mutually
j:k
exclusive alternative.
5.4 Use the NB method when the focus is on the benefits
N
rather than project costs.
¯ t
PVNB 5 ~B 2 C !/ 11i (1)
~ !
j:k t t
(
t50
5.5 UsetheNSmethodwhenthefocusinonprojectsavings
(that is, reductions in project costs).
The NIST Building Life-Cycle Cost (BLCC) Computer Program helps users
calculate measures of worth for buildings and building components that are
Available from ASTM International Headquarters. Order Adjunct No. consistent with ASTM standards. The program is downloadable from http://
ADJE091717-EA. Original adjunct produced in 1984.Adjunct last revised in 2003. www.eere.energy.gov/femp/information/download_blcc.html.
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E1074−15 (2020)
where: an initial investment of $10 000 that yields an uneven yearly
cash flow over four years. (Implicitly, the mutually exclusive
B = dollar value of benefits in period t for the building or
t
alternative is the do nothing case.)Assuming a discount rate of
system being evaluated,A, less the counterpart benefits
j
15 %,thediscountedcashflowsyieldaPVNBof$1823.(Note
in period t for the mutually exclusive alternative against
that the sum of net cash flows, $7000, is a much larger value,
which it is being compared, A ,
k
¯
= dollar costs, including investment costs, in period t for since it fails to account for the eroding value of money over
C
t
the building or system being evaluated, A, less the
time.) The larger the PVNB for a given project, the more
j
counterpart costs in period t for the mutually exclusive
economically attractive it will be, other things being equal.
alternative against which it is being compared, A ,
k
7.8 To find the AVNB that is time equivalent to $1823, use
N = number of discounting time periods in the study period,
Eq 2. The equivalent AVNB is $639.
and
i = the discount rate per time period.
8. Analysis of NB (NS) Results and the Decision
7.3 Use Eq 2 to convert the present value of net benefits to
annualvalueterms,whereNisthenumberofyearsinthestudy 8.1 Use the results of the NB (NS) computation to rank
period and i is the discount rate.
order alternatives from highest to lowest NB (NS). The
N N alternative with the highest NB (NS) is the most cost effective.
AVNB 5 PVNB · i 11i / 11i 2 1 # (2)
@~ ~ ! ! ~~ ! !
j:k j:k
where AVNB = annual value of net benefits.
j:k
8.2 In the final investment decision, take into account not
7.4 Use Eq 3 to compute the present value of net savings
only the numerical values of NB (NS), but also uncertainty of
(PVNS ) for the proposed project, A, relative to its mutually
j:k j investment alternatives relative to the risk attitudes of the
exclusive alternative, A . The terms appearing in Eq 3 are
k investor, the availability of funding and other cash-flow
based on the life-cycle cost (LCC) method, Practice E917.
constraints, any unquantified effects attributable to the
Subtract from project costs in the year in which they occur any
alternatives, and the possibility of noneconomic objectives.
pure benefits (for example, increased rental income due to
(These topics are discussed in Section 10 of Practice E917.)
improvements) in the LCC calculation.
8.2.1 Decision-makers typically experience uncertainty
PVNS 5 LCC 2 LCC (3)
j:k k j about the correct values to use in establishing basic assump-
tions and in estimating future costs. Guide E1369 recommends
where:
techniques for treating uncertainty in parameter values in an
LCC = the life-cycle costs of the alternative under
j
economicevaluation.Italsorecommendstechniquesforevalu-
consideration, A, and
j
ating the risk that a project will have a less favorable economic
LCC = the life-cycle costs of the mutually exclusive
k
outcome than what is desired or expected. Practice E1946
alternative, A .
k
establishes a procedure for measuring cost risk for buildings
7.5 Use Eq 4 to convert the present value of net savings to
and building systems, using the Monte Carlo simulation
annualvalueterms,whereNisthenumberofyearsinthestudy
techniqueasdescribedinGuideE1369.PracticeE917provides
period and i is the discount rate.
direction on how to apply Monte Carlo simulation when
N N
AVNS 5 PVNS · i 11i / 11i 2 1 (4)
@~ ~ ! ! ~~ ! !# performing economic evaluations of alternatives designed to
j:k j:k
mitigatetheeffectsofnaturalandman-madehazardsthatoccur
where:
infrequently but have significant consequences. Practice E917
AVNS = annual value of net savings.
j:k
containsacomprehensiveexampleontheapplicationofMonte
7.6 For a given problem and data set, solutions in either
Carlo simulation in evaluating the merits of alternative risk
present value or annual value terms will be time equivalent
mitigation strategies for a prototypical data center.
values (although different in actual dollar values) and will
8.2.2 Describe any significant effects that remain unquanti-
result in the same investment or design decisions, provided
fied. Explain how these effects impact the recommended
annual values are calculated using Eq 2 for net benefits and Eq
alternative. Refer to Practice E1765 for guidance on how to
4 for net savings.
present unquantified effects along with the computed values of
7.7 Asimple application of Eq 1 is presented in Table 1 for NB (NS) or any other measures of economic performance.
TABLE 1 Calculation of Net Benefits
A
Net Cash Flow
SPV Factor
¯
Year, t Benefits, B , dollars PVNB, dollars
Costs, C , dollars
t
t ¯
for i=15 %
B −C , dollars
t t
0 0 10 000 −10 000 1.000 −10 000
1 4 000 3 000 +1 000 0.8696 +870
2 11 500 4 500 +7 000 0.7561 +5 293
3 10 000 4 000 +6 000 0.6575 +3 945
4 8 000 5 000 +3 000 0.5718 +1 715
Total 33 500 26 500 +7 000 +1 823
A
TofindthePVNBofthenetcashflowforeachdiscountingperiod,thesinglepresentvalue(SPV)discountfactorismultipliedtimesthenetcashflow.Foranexplanation
of discounting factors and how to use them, see Discount Factor Tables.
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9. Applications 9.5 TheNB(NS)methodisalsousedtocompareprojectsor
designs competing for the same purpose to see which is most
9.1 The NB (NS) measure indicates that a given project is
economically efficient. Typical examples from the building
cost effective if the PVNB (PVNS) is greater than zero. If the
industry include: (1) how to select between single, double, or
PVNB (PVNS) is less than zero, then the project is not cost
tripleglazing;(2)howtochoosebetweenasolarenergysystem
effective.
and a conventional energy system; and (3) how to choose
9.2 How large an investment to make (that is, what is the
between a large dam and a small dam with levees to provide
most economically efficient scale) is generally answered with
flood control. The most economically efficient project in each
NB (NS) analysis. The size or scale of investment is increased
case would be the one with the greatest PVNB or PVNS,
until the PVNB (PVNS) is maximized. Typical size or scale
depending on the method utilized (Note 2).Applying Eq 1, for
examples from the building industry include (1) how large a
example, to the selection of a flood control project, if PVNB is
buildingtoconstruct, (2)howlargeadamtoconstruct, (3)how
greater for the small dam and levees than for the large dam,
much insulation to put in a house, and (4) how many square
then the small dam and levees are the economically preferred
feet of collector area to install in a solar energy system.
system.
9.3 Fig. 1 illustrates graphically how the NB method is used
NOTE 2—In these applications of NB (NS) analysis, it is assumed that
to choose the economically efficient level of energy conserva-
the initial cost of the alternatives considered does not exceed the available
tion in a building (that is, where the PVNB is maximized).
budget.
Conservation costs, in present value terms, are shown to
9.5.1 In using PVNB (PVNS) to compare mutually exclu-
increase at an increasing rate as the physical quantity of inputs
sive projects (that is, a set of projects from which one
to conserve energy (Q) is increased (for example, increased
i
alternative can be selected), a common study period is required
insulation). Conservation benefits (in present value terms), as
for a valid economic comparison.
measured by dollar energy savings, also increase with addi-
9.5.1.1 In comparing projects competing for the same
tional inputs to energy conservation, but at a decreasing rate.
purpose, the analyst must sometimes normalize the PVNB
The difference between these dollar conservation benefits and
(PVNS) with respect to time in order to have a valid economic
costs at any given level of conservation inputs is the PVNB.
comparison. The PVNB (PVNS) of projects with identical
The level of energy conservation where the PVNB is maxi-
expected lives can be compared directly. If the expected lives
mized is Q .Any smaller (Q ) or larger investments (Q or Q )
e 1 2 3
are different, however, adjustments are required. A common
than Q would be economically inefficient, because the poten-
e
adjustment is to convert each project’s life to the least common
tial PVNB (profit) is greatest at Q (Note 1). Therefore, when
e
multiple of the lives of all projects under consideration. By
using PVNB as a guide, the economically efficient level of
making assumptions about reinvestment costs and earnings, a
insulation for a building is found by increasing applications of
time-normalized PVNB (PVNS) can then be calculated for
insulation until the PVNB is maximized.
each project for comparison over the common study period.
9.5.1.2 A second approach is to select the relevant time
NOTE 1—The efficient size could be smaller than Q if the investment
e
budget were limited and if other projects were available with incremental
horizon of the investor as the length of the study period. Then
benefit-to-cost ratios greater than one.
use replacements and residual values to evaluate each alterna-
9.4 Fig. 1 also illustrates the application described in 9.1. tive within the common study period.
9.5.1.3 A third approach for comparing projects with un-
That is, any level of conservation inputs portrayed in Fig. 1
within the bounds of zero and Q would be a cost-effective equal lives is to convert the PVNB calculated on the basis of
each project’s life to an annual value of net benefits (AVNB)
investment.
using Eq 2. To convert the PVNS calculated on the basis of
each project’s life to an annual value of net savings (AVNS),
use Eq 4. The AVNB (AVNS) will yield a valid economic
comparison if the costs and benefits of each project are
replicated exactly with each replacement.
9.6 Aggregate PVNB (PVNS) can be used to determine the
most cost effective allocation of a limited budget among
non-mutuallyexclusiveprojects.Ingeneral,thecombinationof
projects with the greatest aggregate PVNB (PVNS) fitting
within the budget constraint is the most cost effective alloca-
tion. In order to aggregate the NB (NS) of non-mutually
exclusive projects, they must all be computed over the same
study period.
10. Report
10.1 A report of a NB (NS) analysis should include the
following information:
10.1.1 The objective and the alternatives considered.
FIG. 1Finding the Level of Energy Conservation That Maximizes
the PVNB 10.1.2 Key assumptions and data including:
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10.1.2.1 Discount rate; analysts, and researchers a tool for communicating results in a
10.1.2.2 Study period; condensed format to management and non-technical persons.
10.1.2.3 Cost data;
The generic format calls for a description of the significance of
10.1.2.4 Benefits (savings) data;
the project, the analysis strategy, a listing of data and
10.1.2.5 Grants, tax deductions; and
assumptions, and a presentation of the computed values of NB
10.1.2.6 Financing terms.
(NS) or any other measures of economic performance.
10.1.3 The tax status of the investor together with the
method of treating inflation.
11. Keywords
10.1.4 Any significant effects that are not quantified in the
11.1 benefit-cost analysis; building economics; economic
NB (NS) measure.
evaluation methods; engineering economics; life-cycle cost
10.2 Guide E2204 presents a generic format for reporting
analysis; net benefits; net savings
theresultsofaNB(NS)analysis.Itprovidestechnicalpersons,
APPENDIXES
(Nonmandatory Information)
X1. USING PRESENT VALUE NET BENEFITS TO EVALUATE RESIDENTIAL SPRINKLER SYSTEMS
TABLE X1.1 Data and Assumptions for Analysis of Residential
X1.1 Background—Appendix X1 uses the net benefits
Sprinklers
method to measure the expected economic performance of a
Study Period 30 Years
fire sprinkler system installed in a newly constructed, single-
Discount Rate (Real) 4.80 %
family dwelling in the United States. Two alternatives are
Base Year 2005
considered: (1) a dwelling equipped with smoke alarms, and
Investment Cost Data
(2) an identical dwelling equipped with smoke alarms and a
Colonial $2 075
sprinkler system. The objective is to determine if the purchase
Townhouse $1 895
Ranch $829
of the automatic fire sprinkler system is cost-effective. Three
prototypical house types are considered for analyzing the
Benefits per
economic performance of a residential sprinkler system: (1) a Fatality Averted $7.94 million
Injury Averted $171 620
two-storycolonialwithbasement,butnotincludingthegarage;
Direct Property Loss Averted $4 398
(2) a three-story townhouse with basement; and (3) a single-
Indirect Costs Averted $880
Insurance Credit (Annual) $60
story ranch.
X1.2 Data and Assumptions—The benefits experienced by
residents of single-family dwellings with sprinkler systems
combination according to an experimental design (see Guide
include reductions in the following: the risk of owner/occupant
E1369). These analysis types complement and reinforce each
fatalities and injuries, homeowner insurance premiums, unin-
other.
sured direct property losses, and uninsured indirect costs. The
X1.2.2 Benefits—The quantified benefits of a fire sprinkler
primary costs examined are for initial purchase and installation
system used in a single-family dwelling are based on reported
of the sprinkler system. The measure of economic
fire incident data contained within the U.S. Fire Administra-
performance, the PVNB, compares differently timed benefit
tion’s National Fire Incident Reporting System 5.0
and cost cash flows, accruing to an owner/occupant, by
(NFIRS 5.0) (2), and calibrated with reported data based on
discounting them to a reference point in time. All dollars
the National Fire ProtectionAssociation’s annual survey of fire
presented are in 2005 constant dollars. PVNB is calculated by
departments (Hall and Harwood, 1989) (3), over the period of
subtracting present value costs from the present value benefits.
2002 to 2005 (Ahrens, 2007) (4). This study period was
Data and assumptions needed to evaluate the decision are
selected due to the relative completeness of fire incident
summarized in Table X1.1.
records nationwide, thus ensuring that the nationwide trends
and patterns used in this analysis are representative of U.S. fire
X1.2.1 Analysis Strategy—Two types of analyses are used
risks. Over the 2002 to 2005 study period, houses equipped
to evaluate the merits of residential sprinklers. First, a baseline
with smoke alarms and a wet-pipe sprinkler system (that is, a
analysis is performed in which all values are fixed. Second, a
system fully-charged with water at all times) experienced
sensitivity analysis employing Monte Carlo simulation is
100 % fewer owner/occupant fatalities, 57 % fewer owner/
performed in which key input variables are allowed to vary in
occupant injuries, and 32 % less direct property losses and
5 6
Appendix X1 is based largely on a National Institute of Standards and The boldface numbers in parentheses refer to a list of references at the end of
Technology (NIST) report (Butry, Brown, and Fuller, 2007) (1). this standard.
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indirect costs resulting from fire than houses equipped only injuries associated with mattresses and upholstered furniture.
withsmokealarms.Inaddition,homeownersofdwellingswith These two studies found estimates of $150 000 (in 2005
fire sprinkler systems received an added bonus of an 8 % dollars) per injury from fires involving mattresses and
reductionintheirhomeownerinsurancepremiumperyear.The $187 000 (in 2004 dollars) per injury from fires involving
monetized value of a residential fire sprinkler system, over a upholstered furniture (Zamula, 2005) (6). CPSC therefore
30-year analysis period, yields homeowners $4994 in present
recommended the amounts of $150 000 and $187 000 as
value benefits. In the baseline analysis, the colonial, reasonable and reliable estimates of the value of a fire-related
townhouse, and ranch-style house were all assigned the same
injury averted (Zamula, 2004; Zamula, 2005; Ray et al., 1993)
economic benefits from installation of a residential fire sprin-
(7, 6, 8). As the value of an injury averted, the inflation
kler system. The assignment of equal economic benefits was adjustedmiddlevaluebetweenCPSCstudiesonmattressesand
due to an inability to identify differential benefits among the
upholstered furniture of $171 620 is used in this analysis.
three house types. This is because the NFIRS 5.0 data did not
X1.2.3 Costs—The quantified costs of a fire sprinkler sys-
differentiate housing type or number of stories, other than
tem are based on the findings of NISTIR 7277 (9). NIS-
indicating it was a one- to two-family dwelling. However, one
TIR 7277 documented the design and installation costs of four
might expect more benefits to be gained with sprinklers in a
different wet-pipe sprinkler systems within three prototypical
two-story house, due to the increased potential for keeping exit
house types. Of the alternative sprinkler systems examined in
routes open. Two key benefits—the value of a statistical life
NISTIR 7277, the multipurpose network system was generally
and the value of a statistical injury—merit a closer examina-
the least costly (life-cycle cost) across the three house types.
tion.Assigningadollarvaluetoastatisticallifesavedorinjury
Themultipurposenetworksystemwasthereforeselectedasthe
averted has become a generally accepted part of economic
fire sprinkler system examined in this analysis. The costs
methodology. The magnitude of the values is often a critical
associated with installation of a multipurpose network sprin-
input to economic analysis because a reduction of the risk of
kler system are based on the minimum standard required by
death or injury may be a substantial benefit component.
NFPA 13D (10).The three prototypical house types considered
However,empiricalestimatesofthevalueoflifecontinuetobe
2 2
are: (1) a 3338 ft (310 m ) two-story colonial with basement,
subject to controversy and inconsistency. For example, basing
2 2
but not including the garage; (2) a 2257 ft (210 m ) three-
the value of a life on the present value of earnings potential—a
2 2
story townhouse with basement; and (3) an 1171 ft (109 m )
measure that is sometimes used—tends to result in compara-
single-story ranch. The present value costs of installation of a
tively low values for the young and the old and, in our present
multipurpose network sprinkler system are estimated to be
economy, for women and non-Caucasians. Using court-
$2075 for the colonial, $1895 for the townhouse, and $829 for
assigned values for death, pain, and injury inflicted—another
the ranch.
approach—results in widely variable amounts. The value of
saving lives and reducing pain and injury implicitly assigned
X1.3 Baseline Analysis—The baseline analysis uses the
by government programs also vary widely.
“best available information” to construct a fixed set of input
X1.2.2.1 Value of a Statistical Life—One approach that is
values. These inputs are used to estimate benefits and costs.
considered to be consistent with economic theory is based on
X1.3.1 Estimated Benefits of Multipurpose Network Sprin-
the willingness-to-pay concept. Willingness-to-pay values are
computed according to how much decision-makers are willing kler Systems in Residential Dwellings—Table X1.2 summa-
to invest to reduce their risk of death or injury by a certain rizesthedatausedtocalculatethepresentvaluebenefitsforthe
fraction. Using evidence on labor and product market choices five classes of benefits described in X1.3.1.1 – X1.3.1.5.It
that involve implicit tradeoffs between risk and wage or includes benefits from fatalities averted, injuries averted, direct
between risk and price, economists have developed estimates propertylossesaverted,indirectcostsaverted,andaninsurance
of the value of a statistical life typically ranging from $4 credit due to sprinkler use within residential properties. The
uniform present worth factor of 15.729 for annually recurring
million to $9 million with a median value of about $7 million
(in 2000 dollars) (Viscusi and Aldy, 2003) (5). The inflation amounts is based on a 30-year study period and a real discount
adjusted median value of a statistical life, $7.94 million (in rate of 4.8 %, which reflects the real, after-tax annual rate of
2005 dollars), is used in this analysis. return on large-cap stocks over the period 1925 to 2005
(Ibbotson Associates, 2005) (11). Installation of a sprinkler
X1.2.2.2 Value of a Statistical Injury—The same
system is expected to yield a present value benefit of $4994,
willingness-to-pay approach that is used to estimate the value
over the 30-year study period. Each benefit component is
of a statistical life saved can be used to estimate the value of a
detailed below.
statistical injury averted. In a survey of 31 studies from the
U.S.labormarketandeightstudiesoflabormarketsoutsidethe X1.3.1.1 Fatalities Averted—One- and two-family dwell-
United States, Viscusi and Aldy (2003) (5) found estimates ings with a wet-pipe sprinkler system were found to have zero
ranging up to $191 000 with most of the estimates between fatalities in reported fires over the study period 2002 to 2005.
$20 000 and $70 000 (in 2000 dollars). The U.S. estimates are However, field tests indicate sprinklers fail to activate 3 % of
mostly based on job-related injury rates and lost workday rates the time (Hall, 2007) (12), so a 100 % reduction in fatalities,
from the Bureau of Labor Statistics and not specifically on over dwellings with only smoke alarms, may be too optimistic.
fire-related injuries. The U.S. Consumer Product Safety Com- Section X1.4 deals with this uncertainty and its effects on the
mission (CPSC) conducted two studies of residential fire results of the analysis. The value of a fatality averted is
ϵ1
E1074−15 (2020)
A
TABLE X1.2 Calculation of Present Value Benefits of Wet-Pipe Sprinkler Systems
Input Parameters Calculated Outputs
Reduction in Annual
Probability of Fatality,
Given Fire, Between Dwelling
with Only
Smoke Alarms and Dwelling Expected Number of
with Smoke Fatalities, per Fire, in
Probability of Fire Alarms and a Sprinkler Dwellings with Only Value of Statistical
Occurrence System Smoke Alarms Life ($ million) Annual Benefit ($) Present Value Benefit ($)
Fatalities Averted 0.0036 1.0000 0.0082 7.94 236.86 3725.57
Reduction in Annual
Probability of Injury,
Given Fire, Between Dwelling
with Only
Smoke Alarms and Dwelling Expected Number of
with Smoke Injuries, per Fire, in
Probability of Fire Alarms and a Sprinkler Dwellings with Only Value of Statistical
Occurrence System Smoke Alarms Injury ($) Annual Benefit ($) Present Value Benefit ($)
Injuries Averted 0.0036 0.5679 0.0403 171 620 14.29 224.74
Reduction in Annual
Probability of Direct
Uninsured Property Loss,
Given Fire,
Between Dwelling with Only
Smoke Alarms and Dwelling Expected Direct Uninsured
with Smoke Property Loss, per Fire, in
Probability of Fire Alarms and a Sprinkler Dwellings with Only
Occurrence System Smoke Alarms Annual Benefit ($) Present Value Benefit ($)
Direct Property 0.0036 0.3166 4397.96 5.06 7
...