ASTM E964-93(1998)e1
(Practice)Standard Practice for Measuring Benefit-to-Cost and Savings-to-Investment Ratios for Buildings and Building Systems
Standard Practice for Measuring Benefit-to-Cost and Savings-to-Investment Ratios for Buildings and Building Systems
SCOPE
1.1 This practice presents 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.
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Standards Content (Sample)
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e1
Designation: E 964 – 93 (Reapproved 1998) An American National Standard
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 E 964; 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 (e) indicates an editorial change since the last revision or reapproval.
e NOTE—Footnote 5 of this standard was editorially corrected in Sept 1998.
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,
life-cycle cost, internal rate-of-return, adjusted internal rate-of-return, and payback (see Practices
E 917, E 1057, E 1074, and E 1121). Guide E 1185 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
of the ratio. A ratio less than 1.0 indicates a project that is uneconomic, a ratio of 1.0 indicates a project
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 and Building Systems
E 1057 Practice for Measuring Internal Rate of Return and
1.1 This practice presents a procedure for calculating and
Adjusted Internal Rate of Return for Investments in Build-
interpreting benefit-to-cost ratios (BCR) and savings-to-
ings and Building Systems
investment ratios (SIR) as an aid for making building-related
E 1074 Practice for Measuring Net Benefits for Investments
decisions.
in Buildings and Building Systems
1.2 A basic premise of the BCR and SIR methods is that
E 1121 Practice for Measuring Payback for Investments in
future as well as present benefits and costs arising from a
Building and Building Systems
decision are important to that decision, and, if measurable in
E 1185 Guide for Selecting Economic Methods for Evalu-
dollars, should be included in calculating the BCR and SIR.
ating Investments in Buildings and Building Systems
1.3 Dollar amounts used to calculate BCR and SIR are all
2.2 ASTM Adjuncts:
discounted, that is, expressed in time-equivalent dollars, either
Discount Factor Tables, Adjunct to Practice E 917
in present value or uniform annual value terms.
Computer Program and User’s Guide to Building Main-
2. Referenced Documents
tenance, Repair, and Replacement Database for Life-
Cycle Cost Analysis, Adjunct to Practices E 917, E 964,
2.1 ASTM Standards:
E 1057, E 1074, and E 1121
E 833 Terminology of Building Economics
E 917 Practice for Measuring Life-Cycle Costs of Buildings
3. Terminology
3.1 Definitions—For definitions of terms used in this
practice, refer to Terminology E 833.
This practice is under the jurisdiction of ASTM Committee E-6 on Performance
of Buildings and is the direct responsibility of Subcommittee E06.81 on Building
Economics.
Current edition approved Jan. 15, 1993. Published March 1993. Originally Available from ASTM Headquarters. Order PCN 12-509179-10.
published as E 964 – 83. Last previous edition E 964 – 89. Available from ASTM Headquarters. Order PCN 12-509171-10 for the 3.5 in.
Annual Book of ASTM Standards, Vol 04.11. disk. Order PCN 12-509172-10 for the 5.25 in. disk.
Copyright © ASTM, 100 Barr Harbor Drive, West Conshohocken, PA 19428-2959, United States.
NOTICE: This standard has either been superseded and replaced by a new version or discontinued.
Contact ASTM International (www.astm.org) for the latest information.
E 964
4. Summary of Practice constraints that limit potential alternatives for accomplishing
the objectives should be identified. Third, alternatives that are
4.1 This practice identifies related ASTM standards and
technically and otherwise feasible in light of the constraints
adjuncts. It outlines the recommended steps for carrying out an
should be identified.
analysis using the BCR or SIR method, explains each step, and
7.2 The example in this section illustrates the objective,
gives examples. This practice discusses the importance of
constraints, and alternatives for a building investment that
specifying objectives, alternatives, and constraints at the outset
could be evaluated using the BCR method. The decisionmak-
of an evaluation. It identifies data and assumptions needed for
er’s objective is to maximize net benefits (profits) from
calculating BCRs and SIRs, and shows how to calculate the
investment in new stores in a national chain. The problem is to
ratios. This practice emphasizes the importance of correctly
choose locations for the stores. There are two constraints: (1)
interpreting the meaning of the ratios in different applications,
the chain already has a sufficient number of stores in the
and of taking into account uncertainty, unquantified effects, and
northeast, and (2) there is only enough investment capital to
funding constraints. It identifies requirements for documenta-
open five stores. Twelve alternative locations (excluding loca-
tion and recommends appropriate contents for a BCR or SIR
tions in the northeast) are identified as potentially profitable.
report. This practice also explains and illustrates the applica-
The BCR can help the decisionmaker identify which five of the
tion of the BCR and SIR methods to decide whether to accept
twelve potential locations will maximize aggregate net benefits
or reject a project, how much to invest in a project, and how to
(profits) from the available budget. The approach is to compute
allocate limited investment funds among competing uses.
a BCR for each location and rank the locations in descending
5. Significance and Use
order of their BCRs. If the budget cannot be fully allocated by
selecting locations in descending order of their BCRs, the
5.1 The BCR and SIR provide measures of economic
computation of aggregate net benefits is recommended to
performance in a single number that indicates whether a
confirm that aggregate net benefits are maximized by the
proposed building or building system is preferred over a
selected locations.
mutually exclusive alternative that serves as the base for
7.3 The example in this section describes the objective,
computing the ratio. It may be contrasted with the life-cycle
constraints, and alternatives for a building investment that
cost (LCC) method that requires two LCC measures to evaluate
could be evaluated using the SIR method. The building is a jail.
the economic performance of a building or building system—
The objective is to reduce the cost of maintaining a target level
one for each alternative.
of security (as might be measured by number of escapees per
5.2 The ratio indicates discounted dollar benefits (or sav-
year). Constraints are that techniques to increase security must
ings) per dollar of discounted costs.
be unobtrusive to the surrounding neighborhood and must have
5.3 The BCR or SIR can be used to determine if a given
low maintenance. The superintendent of prisons is evaluating
building or building system is economic relative to the alter-
with the SIR method a new perimeter detection device that
native of not having it.
costs $1 million to install, and reduces labor costs for guards by
5.4 The BCR or SIR computed on increments of benefits (or
30 %. If the SIR is greater than 1.0, the device is deemed cost
savings) and costs can be used to determine if one design or
effective.
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
8. Data and Assumptions
economically efficient set of projects among many competing
8.1 Guidelines for compiling data and making assumptions
for limited funding. The efficient set of projects will maximize
are treated in detail in Practice E 917, and therefore they are
aggregate net benefits or net savings obtainable for the budget.
discussed only briefly here.
6. Procedure
8.2 To calculate BCR or SIR, estimates typically are needed
for revenue or other benefits; acquisition costs, including costs
6.1 The recommended steps for carrying out an economic
of planning, design, engineering, construction, purchase, in-
evaluation using the BCR or SIR method are summarized as
stallation, land, and site preparation; utility costs, including
follows:
costs of energy, water, and sewage; nonenergy operating and
6.1.1 Identify objectives, constraints, and alternatives (see
maintenance costs; repair and replacement costs; resale or
Section 7),
retention values; disposal costs; insurance costs; and, if appli-
6.1.2 Compile data and establish assumptions for the evalu-
cable, functional use costs. The microcomputer program data-
ation (see Section 8),
base and adjunct user’s guide are helpful in estimating main-
6.1.3 Compute BCR or SIR (see Section 9),
tenance, repair, and replacement costs.
6.1.4 Analyze the BCR or SIR results and make a decision,
8.3 Information is also needed regarding the study period,
taking into account uncertainty, unquantified effects, and fund-
discount rate, tax rates and applicable tax rules, and, if an
ing or cash-flow constraints (see Section 10), and
integral part of the investment package, the terms of financing.
6.1.5 Document the evaluation and prepare a report if
(These topics are treated in Section 8 of Practice E 917.)
needed (see Section 11).
8.4 The outcome of an analysis will vary, depending on the
7. Objectives, Constraints, and Alternatives
data estimates and assumptions. Thus, it is important to select
7.1 First, the decisionmaker’s objectives should be clearly carefully the assumed values for critical parameters to arrive at
specified. This is crucial to defining the problem and determin- a realistic solution.
ing the suitability of the BCR or SIR method. Second, 8.5 If the outcome appears particularly sensitive to the value
NOTICE: This standard has either been superseded and replaced by a new version or discontinued.
Contact ASTM International (www.astm.org) for the latest information.
E 964
assigned to a given parameter, and the estimate is of poor or peting projects that differ significantly in their maintenance
unknown quality, the analyst may wish to improve the quality costs, placing maintenance costs in the denominator with
of the data. (Sensitivity analysis, a useful technique for
investment costs tends to bias selection away from projects
identifying critical parameters, is treated in Section 10.3 of
with relatively high maintenance costs, even when they offer
Practice E 917.)
higher net benefits (profits) than competing projects. Similar
8.6 According to personal preference or organizational
biasing effects can occur in the placement of other noninvest-
policy, the analyst normally adopts a simplified model of
ment costs such as energy or labor costs. This outcome reflects
cash-flow timing to describe the occurrence of costs and
the fact that adding a given amount to the denominator of a
benefits within each year; elects whether to express discounted
ratio reduces the quotient more than does subtracting an
amounts in present-value dollars or in annual-value dollars;
identical amount from the numerator. Placing all noninvest-
and decides whether to work in constant dollars using a real
ment costs in the numerator will eliminate this bias when the
discount rate or in current dollars using a nominal discount
objective is to maximize the return on the investment budget.
rate. (These topics are treated in Section 8 of Practice E 917.)
9.5 Eq 1 and 2 provide formulations of the BCR and SIR
8.7 The level of effort that goes into the evaluation may
that avoid biasing effects, and allow the analyst flexibility in
range from an inexpensive, back-of-the-envelope calculation
choosing the part of the investment budget on which to
intended to provide a ball-park estimate, to an expensive,
maximize the return. Eq 1 is used when benefits predominate,
detailed, thoroughly documented analysis intended to with-
and Eq 2 when a project’s primary advantage is lower costs.
stand scrutiny and to provide as much accuracy as possible.
N
Different levels of effort are appropriate for different circum-
t
~B 2 C !/~1 1 i!
(
t t
stances. (Factors influencing the level of effort are discussed in
t50
BCR 5 (1)
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the paragraph on comprehensiveness in Section 8 of Practice
t
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( t
E 917.)
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9. Calculation of BCR and SIR
where:
BCR 5 benefit-to-cost ratio,
9.1 In concept, the BCR and SIR are simple: benefits (or
B 5 benefits in period t; that is, advantages in revenue or
t
savings) divided by costs, where all dollar amounts are
performance, measured in dollars, of the building or
discounted to present or annual values.
system as compared with a mutually exclusive
9.2 In practice, it is important to formulate the ratio so as to
alternative (See Note 1),
satisfy the investor’s objective. This requires attention to the
C 5 costs in period t, excluding investment costs that are
t
placement of costs in the numerator and denominator. To
to be placed in the denominator for the building or
maximize net benefits from a designated expenditure, it is
system, less counterpart costs in period t for a
necessary to place in the denominator only that portion of costs
mutually exclusive alternative,
on which the investor wishes to maximize returns. For ex-
I 5 those investment costs in period t on which the
t
ample, to maximize the return on investor equity, place only
investor wishes to maximize the return, less similar
that part of the investment budget representing investor’s
investment costs in period t for a mutually exclusive
equity funds in the denominator of the ratio; deduct other costs
alternative, and
from benefits or savings in the numerator. On the other hand,
i 5 the discount rate.
to maximize the r
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