ASTM E964-06(2010)

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Designation:E964 −06(Reapproved 2010)
Standard Practice for
Measuring Benefit-to-Cost and Savings-to-Investment Ratios
for Buildings and Building Systems
This standard is issued under the fixed designation E964; 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.
INTRODUCTION
This is one in a series of practices for applying economic evaluation methods to building-related
decisions. Methods covered by this practice are benefit-to-cost ratio (BCR) and savings-to-investment
ratio (SIR). These are members of a family of economic evaluation methods that can be used to
measure the economic consequences of a decision over a specified period of time. The BCR is used
when the focus is on benefits (that is, advantages measured in dollars) relative to project costs. The
SIR, a variation of the BCR, is used when the focus is on project savings (that is, cost reductions)
relative to project costs.The family of methods includes, in addition to BCR and SIR, net benefits, net
savings, life-cycle cost, internal rate-of-return, adjusted internal rate-of-return, and payback (see
Practices E917, E1057, E1074, and E1121). Guide E1185 directs you to the appropriate method for
a particular economic problem.
BCR and SIR are numerical ratios that indicate the economic performance of a project by the size
oftheratio.Aratiolessthan1.0indicatesaprojectthatisuneconomic,aratioof1.0indicatesaproject
whose benefits or savings just equal its costs, and a ratio greater than 1.0 indicates a project that is
economic. While it is straightforward to use ratios to determine whether a given project is economic
or uneconomic, care must be taken to correctly interpret ratios when using them to choose among
alternative designs and sizes of a project, or to assign priority to projects competing for limited funds.
1. Scope 2. Referenced Documents
1.1 This practice covers a procedure for calculating and 2.1 ASTM Standards:
interpreting benefit-to-cost ratios (BCR) and savings-to- E631 Terminology of Building Constructions
E833 Terminology of Building Economics
investment ratios (SIR) as an aid for making building-related
decisions. E917 Practice for Measuring Life-Cycle Costs of Buildings
and Building Systems
1.2 A basic premise of the BCR and SIR methods is that
E1057 Practice for Measuring Internal Rate of Return and
future as well as present benefits and costs arising from a
Adjusted Internal Rate of Return for Investments in
decision are important to that decision, and, if measurable in
Buildings and Building Systems
dollars, should be included in calculating the BCR and SIR.
E1074 Practice for Measuring Net Benefits and Net Savings
1.3 Dollar amounts used to calculate BCR and SIR are all
for Investments in Buildings and Building Systems
discounted, that is, expressed in time-equivalent dollars, either
E1121 Practice for Measuring Payback for Investments in
in present value or uniform annual value terms.
Buildings and Building Systems
E1185 Guide for Selecting Economic Methods for Evaluat-
ing Investments in Buildings and Building Systems
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 Oct. 1, 2010. Published November 2010. Originally contact ASTM Customer Service at service@astm.org. For Annual Book of ASTM
ε1
approved in 1983. Last previous edition approved in 2006 as E964 – 06 . DOI: Standards volume information, refer to the standard’s Document Summary page on
10.1520/E0964-06R10. the ASTM website.
Copyright © ASTM International, 100 Barr Harbor Drive, PO Box C700, West Conshohocken, PA 19428-2959. United States
E964−06 (2010)
E1369 Guide for Selecting Techniques for Treating Uncer- 5.5 The BCR or SIR can be used as an aid to select the
tainty and Risk in the Economic Evaluation of Buildings economically efficient set of projects among many competing
and Building Systems for limited funding. The efficient set of projects will maximize
E1765 Practice for Applying Analytical Hierarchy Process aggregate net benefits or net savings obtainable for the budget.
(AHP) to Multiattribute DecisionAnalysis of Investments
Related to Buildings and Building Systems 6. Procedure
E1946 Practice for Measuring Cost Risk of Buildings and
6.1 The recommended steps for carrying out an economic
Building Systems and Other Constructed Projects
evaluation using the BCR or SIR method are summarized as
E2204 Guide for Summarizing the Economic Impacts of
follows:
Building-Related Projects
6.1.1 Identify objectives, constraints, and alternatives (see
2.2 ASTM Adjuncts:
Section 7),
Discount Factor Tables, Adjunct to Practices E917, E964,
6.1.2 Compile data and establish assumptions for the evalu-
E1057, E1074, and E1121
ation (see Section 8),
6.1.3 Compute BCR or SIR (see Section 9),
3. Terminology
6.1.4 Analyze the BCR or SIR results and make a decision,
3.1 Definitions—For definitions of terms used in this
taking into account uncertainty, unquantified effects, and fund-
practice, refer to Terminologies E631 and E833.
ing or cash-flow constraints (see Section 10), and
6.1.5 Document the evaluation and prepare a report if
4. Summary of Practice
needed (see Section 11).
4.1 This practice identifies related ASTM standards and
adjuncts. It outlines the recommended steps for carrying out an 7. Objectives, Constraints, and Alternatives
analysis using the BCR or SIR method, explains each step, and
7.1 First, the decisionmaker’s objectives should be clearly
gives examples. This practice discusses the importance of
specified.This is crucial to defining the problem and determin-
specifying objectives, alternatives, and constraints at the outset
ing the suitability of the BCR or SIR method. Second,
of an evaluation. It identifies data and assumptions needed for
constraints that limit potential alternatives for accomplishing
calculating BCRs and SIRs, and shows how to calculate the
the objectives should be identified. Third, alternatives that are
ratios. This practice emphasizes the importance of correctly
technically and otherwise feasible in light of the constraints
interpreting the meaning of the ratios in different applications,
should be identified.
andoftakingintoaccountuncertainty,unquantifiedeffects,and
7.2 The example in this section illustrates the objective,
funding constraints. It identifies requirements for documenta-
constraints, and alternatives for a building investment that
tion and recommends appropriate contents for a BCR or SIR
could be evaluated using the BCR method. The decisionmak-
report. This practice also explains and illustrates the applica-
er’s objective is to maximize net benefits (profits) from
tion of the BCR and SIR methods to decide whether to accept
investment in new stores in a national chain. The problem is to
or reject a project, how much to invest in a project, and how to
choose locations for the stores. There are two constraints: (1)
allocate limited investment funds among competing uses.
the chain already has a sufficient number of stores in the
northeast, and (2) there is only enough investment capital to
5. Significance and Use
open five stores. Twelve alternative locations (excluding loca-
5.1 The BCR and SIR provide measures of economic
tions in the northeast) are identified as potentially profitable.
performance in a single number that indicates whether a
TheBCRcanhelpthedecisionmakeridentifywhichfiveofthe
proposed building or building system is preferred over a
twelve potential locations will maximize aggregate net benefits
mutually exclusive alternative that serves as the base for
(profits)fromtheavailablebudget.Theapproachistocompute
computing the ratio. It may be contrasted with the life-cycle
a BCR for each location and rank the locations in descending
cost(LCC)methodthatrequirestwoLCCmeasurestoevaluate
order of their BCRs. If the budget cannot be fully allocated by
the economic performance of a building or building system—
selecting locations in descending order of their BCRs, the
one for each alternative.
computation of aggregate net benefits is recommended to
5.2 The ratio indicates discounted dollar benefits (or sav-
confirm that aggregate net benefits are maximized by the
ings) per dollar of discounted costs.
selected locations.
5.3 The BCR or SIR can be used to determine if a given
7.3 The example in this section describes the objective,
building or building system is economic relative to the alter-
constraints, and alternatives for a building investment that
native of not having it.
couldbeevaluatedusingtheSIRmethod.Thebuildingisajail.
The objective is to reduce the cost of maintaining a target level
5.4 TheBCRorSIRcomputedonincrementsofbenefits(or
of security (as might be measured by number of escapees per
savings) and costs can be used to determine if one design or
year). Constraints are that techniques to increase security must
size of a building or system is more economic than another.
beunobtrusivetothesurroundingneighborhoodandmusthave
low maintenance. The superintendent of prisons is evaluating
with the SIR method a new perimeter detection device that
Available from ASTM International Headquarters. Order Adjunct No.
ADJE091703. costs 1 million dollars to install, and reduces labor costs for
E964−06 (2010)
guards by 30 %. If the SIR is greater than 1.0, the device is 9.2 In practice, it is important to formulate the ratio so as to
deemed cost effective. satisfy the investor’s objective. This requires attention to the
placement of costs in the numerator and denominator. To
8. Data and Assumptions
maximize net benefits from a designated expenditure, it is
8.1 Guidelines for compiling data and making assumptions
necessarytoplaceinthedenominatoronlythatportionofcosts
are treated in detail in Practice E917, and therefore they are
on which the investor wishes to maximize returns. For
discussed only briefly here.
example, to maximize the return on investor equity, place only
8.2 To calculate BCR or SIR, estimates typically are needed that part of the investment budget representing investor’s
for revenue or other benefits; acquisition costs, including costs
equity funds in the denominator of the ratio; deduct other costs
of planning, design, engineering, construction, purchase, from benefits or savings in the numerator. On the other hand,
installation, land, and site preparation; utility costs, including
to maximize the return on the total of equity and borrowed
costs of energy, water, and sewage; nonenergy operating and
investment funds, place their sum in the denominator of the
maintenance costs; repair and replacement costs; resale or
ratio.
retention values; disposal costs; insurance costs; and, if
9.3 Formulation is important because changing the place-
applicable, functional use costs.
ment of cost and benefit items can induce changes in the ratio.
8.3 Information is also needed regarding the study period,
Changing the placement of a cost item from the denominator
discount rate, tax rates and applicable tax rules, and, if an
(where it increases costs) to the numerator (where it decreases
integral part of the investment package, the terms of financing.
benefits or savings) will not cause a project that appears
(These topics are treated in Section 8 of Practice E917.)
economic by one formulation of the ratio to appear uneco-
8.4 The outcome of an analysis will vary, depending on the
nomic by a different formulation. But changes in the numerical
data estimates and assumptions. Thus, it is important to select
value of the ratio can affect relative rankings of competing,
carefully the assumed values for critical parameters to arrive at
independent projects, and thereby influence investment deci-
a realistic solution.
sions.
8.5 Iftheoutcomeappearsparticularlysensitivetothevalue
9.4 Biasing effects, detrimental to economic efficiency, can
assigned to a given parameter, and the estimate is of poor or
resultfromcertainformulationsoftheBCRandSIRratios.For
unknown quality, the analyst may wish to improve the quality
example, when allocating an investment budget among com-
of the data. (Sensitivity analysis, a useful technique for
peting projects that differ significantly in their maintenance
identifying critical parameters, is treated in Section 10.3 of
costs, placing maintenance costs in the denominator with
Practice E917.)
investment costs tends to bias selection away from projects
8.6 According to personal preference or organizational
with relatively high maintenance costs, even when they offer
policy, the analyst normally adopts a simplified model of
higher net benefits (profits) than competing projects. Similar
cash-flow timing to describe the occurrence of costs and
biasing effects can occur in the placement of other noninvest-
benefits within each year; elects whether to express discounted
ment costs such as energy or labor costs. This outcome reflects
amounts in present-value dollars or in annual-value dollars;
the fact that adding a given amount to the denominator of a
and decides whether to work in constant dollars using a real
ratio reduces the quotient more than does subtracting an
discount rate or in current dollars using a nominal discount
identical amount from the numerator. Placing all noninvest-
rate. (These topics are treated in Section 8 of Practice E917.)
ment costs in the numerator will eliminate this bias when the
8.7 The level of effort that goes into the evaluation may objective is to maximize the return on the investment budget.
range from an inexpensive, back-of-the-envelope calculation
9.5 Eq 1 and 2 provide formulations of the BCR and SIR
intended to provide a ball-park estimate, to an expensive,
that avoid biasing effects, and allow the analyst flexibility in
detailed, thoroughly documented analysis intended to with-
choosing the part of the investment budget on which to
stand scrutiny and to provide as much accuracy as possible.
maximize the return. Eq 1 is used when benefits predominate,
Different levels of effort are appropriate for different circum-
and Eq 2 when a project’s primary advantage is lower costs.
stances. (Factors influencing the level of effort are discussed in
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