ASTM E964-15(2020)e1

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.  
5.3 The BCR or SIR can be used to determine if a given building or building system is economic relative to the alternative of not having it.  
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.
SCOPE
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.  
1.6 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.

General Information

• Status: Published
• Publication Date: 31-Mar-2020
• ICS: 91.010.20 - Contractual aspects
• Technical Committee: E06 - Performance of Buildings
• Drafting Committee: E06.81 - Building Economics

Relations

• Replaces: ASTM E964-15 - Standard Practice for Measuring Benefit-to-Cost and Savings-to-Investment Ratios for Buildings and Building Systems
• Effective Date: 01-Apr-2020
• Refers: ASTM E917-17 - Standard Practice for Measuring Life-Cycle Costs of Buildings and Building Systems
• Effective Date: 01-Sep-2017
• Refers: ASTM E1765-16 - Standard Practice for Applying Analytical Hierarchy Process (AHP) to Multiattribute Decision Analysis of Investments Related to Projects, Products, and Processes
• Effective Date: 01-Mar-2016
• Refers: ASTM E1185-15 - Standard Guide for Selecting Economic Methods for Evaluating Investments in Buildings and Building Systems
• Effective Date: 01-Oct-2015
• Refers: ASTM E917-15 - Standard Practice for Measuring Life-Cycle Costs of Buildings and Building Systems
• Effective Date: 01-Oct-2015
• Refers: ASTM E1369-15 - Standard Guide for Selecting Techniques for Treating Uncertainty and Risk in the Economic Evaluation of Buildings and Building Systems
• Effective Date: 01-Oct-2015
• Refers: ASTM E1121-15 - Standard Practice for Measuring Payback for Investments in Buildings and Building Systems
• Effective Date: 01-Oct-2015
• Refers: ASTM E2204-15 - Standard Guide for Summarizing the Economic Impacts of Building-Related Projects
• Effective Date: 01-Aug-2015
• Refers: ASTM E1057-15 - Standard Practice for Measuring Internal Rate of Return and Adjusted Internal Rate of Return for Investments in Buildings and Building Systems
• Effective Date: 01-May-2015
• Refers: ASTM E1074-15 - Standard Practice for Measuring Net Benefits and Net Savings for Investments in Buildings and Building Systems
• Effective Date: 01-May-2015
• Refers: ASTM E631-15 - Standard Terminology of Building Constructions
• Effective Date: 01-Mar-2015
• Refers: ASTM E631-14 - Standard Terminology of Building Constructions
• Effective Date: 01-Nov-2014
• Refers: ASTM E833-13b - Standard Terminology of Building Economics
• Effective Date: 01-Nov-2013
• Refers: ASTM E833-13a - Standard Terminology of Building Economics
• Effective Date: 15-Oct-2013
• Refers: ASTM E833-13 - Standard Terminology of Building Economics
• Effective Date: 01-Oct-2013

Overview

ASTM E964-15(2020)e1, "Standard Practice for Measuring Benefit-to-Cost and Savings-to-Investment Ratios for Buildings and Building Systems," establishes a comprehensive method for economic evaluation of building projects. Developed by ASTM International, this practice outlines procedures for calculating and interpreting Benefit-to-Cost Ratios (BCR) and Savings-to-Investment Ratios (SIR), enabling decision-makers to assess and compare the financial viability of proposed buildings and building system investments.

These economic measures provide a single numerical indicator of whether a project or system is cost-effective compared to alternatives, including the option of doing nothing. The standard is widely used by building professionals, facility managers, and policy makers to maximize the economic efficiency of investments related to construction, renovation, and system upgrades.

Key Topics

• Benefit-to-Cost Ratio (BCR): A metric that quantifies the discounted dollar benefits per dollar of discounted costs, indicating whether a proposed building project is economically preferable when compared to a mutually exclusive alternative.
• Savings-to-Investment Ratio (SIR): Focuses on project savings relative to the investment costs, showing the discounted dollar savings per dollar invested.
• Discounting Future Values: Both BCR and SIR require expressing future and present costs and benefits in equivalent dollar amounts using present value or uniform annual value.
• Comparison with Life-Cycle Cost (LCC): Unlike LCC, which evaluates alternatives using two separate costs for comparison, BCR and SIR condense the economic comparison into a single ratio for clear decision-making.
• Decision-Making Applications: Used to evaluate if a building or system is cost-effective, compare incremental investments in alternative designs, and prioritize projects for limited funding.
• Documentation and Reporting: Emphasizes the importance of thorough documentation of assumptions, data, unquantified effects, and the rationale for decisions.

Applications

This ASTM standard is instrumental for a range of building investment decisions, including:

• Project Evaluation: Quickly determine if a specific building, upgrade, or system is economically justifiable by calculating whether BCR or SIR exceeds 1.0.
• Alternative Design Assessment: Compare different designs or system sizes to identify which achieves greater net economic benefit, by analyzing incremental BCR/SIR values.
• Funding Allocation: Select the most economically efficient set of projects when budgets are limited. This ensures that available funds generate the highest aggregate net benefits or savings.
• Retrofit & Renovation: Inform choices about energy conservation measures, upgrades, and retrofits by assessing their long-term discounted savings relative to investment.
• Strategic Planning: Support informed, data-driven decisions in long-term facility planning, capital improvements, and property acquisition.

Organizations adopting ASTM E964-15(2020)e1 ensure a systematic and standardized approach to investment analysis, improving transparency, accountability, and return on expenditure in the built environment.

Related Standards

Several ASTM standards complement and support E964-15(2020)e1:

• ASTM E917: Practice for Measuring Life-Cycle Costs of Buildings and Building Systems
• ASTM E1057: Practice for Measuring Internal Rate of Return and Adjusted Internal Rate of Return for Investments in Buildings and Building Systems
• ASTM E1074: Practice for Measuring Net Benefits and Net Savings for Investments in Buildings and Building Systems
• ASTM E1121: Practice for Measuring Payback for Investments in Buildings and Building Systems
• ASTM E1185: Guide for Selecting Economic Methods for Evaluating Investments in Buildings and Building Systems
• ASTM E1369: Guide for Selecting Techniques for Treating Uncertainty and Risk in the Economic Evaluation of Buildings and Building Systems

Adhering to ASTM E964-15(2020)e1 and its related standards helps organizations achieve objective, defendable financial analysis for building investments, optimizing both immediate and future outcomes.

Keywords: benefit-cost analysis, benefit-to-cost ratio, savings-to-investment ratio, building economics, investment analysis, ASTM standards, economic evaluation, facilities management, cost-effectiveness, construction investment.

Standards Content (Sample)

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.
ϵ1
Designation:E964 −15 (Reapproved 2020)
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.
ε NOTE—Adjunct title and stock number in 2.2 were updated editorially in April 2020.
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 conversions to SI units that are provided for information only
and are not considered standard.
1.1 This practice covers a procedure for calculating and
1.5 This standard does not purport to address all of the
interpreting benefit-to-cost ratios (BCR) and savings-to-
safety concerns, if any, associated with its use. It is the
investment ratios (SIR) as an aid for making building-related
responsibility of the user of this standard to establish appro-
decisions.
priate safety, health, and environmental practices and deter-
1.2 A basic premise of the BCR and SIR methods is that
mine the applicability of regulatory limitations prior to use.
future as well as present benefits and costs arising from a
1.6 This international standard was developed in accor-
decision are important to that decision, and, if measurable in
dance with internationally recognized principles on standard-
dollars, should be included in calculating the BCR and SIR.
ization established in the Decision on Principles for the
1.3 Dollar amounts used to calculate BCR and SIR are all
Development of International Standards, Guides and Recom-
discounted, that is, expressed in time-equivalent dollars, either
mendations issued by the World Trade Organization Technical
in present value or uniform annual value terms.
Barriers to Trade (TBT) Committee.
1.4 The values stated in inch-pound units are to be regarded
2. Referenced Documents
as standard. The values given in parentheses are mathematical
2.1 ASTM Standards:
E631 Terminology of Building Constructions
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 [e-mail]. For Annual Book of ASTM
approved in 1983. Last previous edition approved in 2015 as E964-15. DOI: Standards volume information, refer to the standard’s Document Summary page on
10.1520/E0964-15R20E01. the ASTM website.
Copyright © ASTM International, 100 Barr Harbor Drive, PO Box C700, West Conshohocken, PA 19428-2959. United States
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E964−15 (2020)
E833 Terminology of Building Economics mutually exclusive alternative that serves as the base for
E917 Practice for Measuring Life-Cycle Costs of Buildings computing the ratio. It may be contrasted with the life-cycle
and Building Systems cost(LCC)methodthatrequirestwoLCCmeasurestoevaluate
E1057 Practice for Measuring Internal Rate of Return and the economic performance of a building or building system—
Adjusted Internal Rate of Return for Investments in one for each alternative.
Buildings and Building Systems
5.2 The ratio indicates discounted dollar benefits (or sav-
E1074 Practice for Measuring Net Benefits and Net Savings
ings) per dollar of discounted costs.
for Investments in Buildings and Building Systems
5.3 The BCR or SIR can be used to determine if a given
E1121 Practice for Measuring Payback for Investments in
building or building system is economic relative to the alter-
Buildings and Building Systems
native of not having it.
E1185 Guide for Selecting Economic Methods for Evaluat-
ing Investments in Buildings and Building Systems 5.4 TheBCRorSIRcomputedonincrementsofbenefits(or
E1369 Guide for Selecting Techniques for Treating Uncer-
savings) and costs can be used to determine if one design or
tainty and Risk in the Economic Evaluation of Buildings size of a building or system is more economic than another.
and Building Systems
5.5 The BCR or SIR can be used as an aid to select the
E1765 Practice for Applying Analytical Hierarchy Process
economically efficient set of projects among many competing
(AHP) to Multiattribute DecisionAnalysis of Investments
for limited funding. The efficient set of projects will maximize
Related to Projects, Products, and Processes
aggregate net benefits or net savings obtainable for the budget.
E1946 Practice for Measuring Cost Risk of Buildings and
Building Systems and Other Constructed Projects
6. Procedure
E2204 Guide for Summarizing the Economic Impacts of
6.1 The recommended steps for carrying out an economic
Building-Related Projects
evaluation using the BCR or SIR method are summarized as
2.2 ASTM Adjunct:
follows:
Discount Factor Tables - Adjunct to E917 Practice for
6.1.1 Identify objectives, constraints, and alternatives (see
Measuring Life-Cycle Costs of Buildings and Building
Section 7),
Systems - Includes Excel and PDF Files
6.1.2 Compile data and establish assumptions for the evalu-
ation (see Section 8),
3. Terminology
6.1.3 Compute BCR or SIR (see Section 9),
3.1 Definitions—For definitions of general terms related to
6.1.4 Analyze the BCR or SIR results and make a decision,
building construction used in this practice, refer to Terminol-
taking into account uncertainty, unquantified effects, and fund-
ogy E631; and for general terms related to building economics,
ing or cash-flow constraints (see Section 10), and
refer to Terminology E833.
6.1.5 Document the evaluation and prepare a report if
needed (see Section 11).
4. Summary of Practice
7. Objectives, Constraints, and Alternatives
4.1 This practice identifies related ASTM standards and
adjuncts. It outlines the recommended steps for carrying out an
7.1 First, the decision-maker’s objectives should be clearly
analysis using the BCR or SIR method, explains each step, and
specified.This is crucial to defining the problem and determin-
gives examples. This practice discusses the importance of
ing the suitability of the BCR or SIR method. Second,
specifying objectives, alternatives, and constraints at the outset
constraints that limit potential alternatives for accomplishing
of an evaluation. It identifies data and assumptions needed for
the objectives should be identified. Third, alternatives that are
calculating BCRs and SIRs, and shows how to calculate the
technically and otherwise feasible in light of the constraints
ratios. This practice emphasizes the importance of correctly
should be identified.
interpreting the meaning of the ratios in different applications,
7.2 The example in this section illustrates the objective,
andoftakingintoaccountuncertainty,unquantifiedeffects,and
constraints, and alternatives for a building investment that
funding constraints. It identifies requirements for documenta-
could be evaluated using the BCR method. The decision-
tion and recommends appropriate contents for a BCR or SIR
maker’s objective is to maximize net benefits (profits) from
report. This practice also explains and illustrates the applica-
investment in new stores in a national chain. The problem is to
tion of the BCR and SIR methods to decide whether to accept
choose locations for the stores. There are two constraints: (1)
or reject a project, how much to invest in a project, and how to
the chain already has a sufficient number of stores in the
allocate limited investment funds among competing uses.
northeast, and (2) there is only enough investment capital to
open five stores. Twelve alternative locations (excluding loca-
5. Significance and Use
tions in the northeast) are identified as potentially profitable.
5.1 The BCR and SIR provide measures of economic
The BCR can help the decision-maker identify which five of
performance in a single number that indicates whether a
the twelve potential locations will maximize aggregate net
proposed building or building system is preferred over a
benefits (profits) from the available budget. The approach is to
compute a BCR for each location and rank the locations in
descending order of their BCRs. If the budget cannot be fully
Available from ASTM International Headquarters. Order Adjunct No.
ADJE091717-EA. Original adjunct produced in 1984.Adjunct last revised in 2003. allocated by selecting locations in descending order of their
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E964−15 (2020)
BCRs, the computation of aggregate net benefits is recom- stances. (Factors influencing the level of effort are discussed in
mended to confirm that aggregate net benefits are maximized the paragraph on comprehensiveness in Section 8 of Practice
by the selected locations. E917.)
7.3 The example in this section describes the objective,
9. Calculation of BCR and SIR
constraints, and alternatives for a building investment that
couldbeevaluatedusingtheSIRmethod.Thebuildingisajail.
9.1 In concept, the BCR and SIR are simple: benefits (or
The objective is to reduce the cost of maintaining a target level
savings) divided by costs, where all dollar amounts are
of security (as might be measured by number of escapees per
discounted to present or annual values.
year). Constraints are that techniques to increase security must
9.2 In practice, it is important to formulate the ratio so as to
beunobtrusivetothesurroundingneighborhoodandmusthave
satisfy the investor’s objective. This requires attention to the
low maintenance. The superintendent of prisons is evaluating
placement of costs in the numerator and denominator. To
with the SIR method a new perimeter detection device that
maximize net benefits from a designated expenditure, it is
costs 1 million dollars to install, and reduces labor costs for
necessarytoplaceinthedenominatoronlythatportionofcosts
guards by 30 %. If the SIR is greater than 1.0, the device is
on which the investor wishes to maximize returns. For
deemed cost effective.
example, to maximize the return on investor equity, place only
that part of the investment budget representing investor’s
8. Data and Assumptions
equity funds in the denominator of the ratio; deduct other costs
8.1 Guidelines for compiling data and making assumptions
from benefits or savings in the numerator. On the other hand,
are treated in detail in Practice E917, and therefore they are
to maximize the return on the total of equity and borrowed
discussed only briefly here.
investment funds, place their sum in the denominator of the
ratio.
8.2 To calculate BCR or SIR, estimates typically are needed
for revenue or other benefits; acquisition costs, including costs
9.3 Formulation is important because changing the place-
of planning, design, engineering, construction, purchase,
ment of cost and benefit items can induce changes in the ratio.
installation, land, and site preparation; utility costs, including
Changing the placement of a cost item from the denominator
costs of energy, water, and sewage; nonenergy operating and
(where it increases costs) to the numerator (where it decreases
maintenance costs; repair and replacement costs; resale or
benefits or savings) will not cause a project that appears
retention values; disposal costs; insurance costs; and, if
economic by one formulation of the ratio to appear uneco-
applicable, functional use costs.
nomic by a different formulation. But changes in the numerical
value of the ratio can affect relative rankings of competing,
8.3 Information is also needed regarding the study period,
independent projects, and thereby influence investment deci-
discount rate, tax rates and applicable tax rules, and, if an
sions.
integral part of the investment package, the terms of financing.
(These topics are treated in Section 8 of Practice E917.)
9.4 Biasing effects, detrimental to economic efficiency, can
resultfromcertainformulationsoftheBCRandSIRratios.For
8.4 The outcome of an analysis will vary, depending on the
example, when allocating an investment budget among com-
data estimates and assumptions. Thus, it is important to select
peting projects that differ significantly in their maintenance
carefully the assumed values for critical parameters to arrive at
costs, placing maintenance costs in the denominator with
a realistic solution.
investment costs tends to bias selection away from projects
8.5 Iftheoutcomeappearsparticularlysensitivetothevalue
with relatively high maintenance costs, even when they offer
assigned to a given parameter, and the estimate is of poor or
higher net benefits (profits) than competing projects. Similar
unknown quality, the analyst may wish to improve the quality
biasing effects can occur in the placement of other noninvest-
of the data. (Sensitivity analysis, a useful technique for
ment costs such as energy or labor costs. This outcome reflects
identifying critical parameters, is treated in 10.3 of Practice
the fact that adding a given amount to the denominator of a
E917.)
ratio reduces the quotient more than does subtracting an
8.6 According to personal preference or organizational
identical amount from the numerator. Placing all noninvest-
policy, the analyst normally adopts a simplified model of
ment costs in the numerator will eliminate this bias when the
cash-flow timing to describe the occurrence of costs and
objective is to maximize the return on the investment budget.
benefits within each year; elects whether to express discounted
9.5 Eq 1 and 2 provide formulations of the BCR and SIR
amounts in present-value dollars or in annual-value dollars;
that avoid biasing effects, and allow the analyst flexibility in
and decides whether to work in constant dollars using a real
choosing the part of the investment budget on which to
discount rate or in current dollars using a nominal discount
maximize the return. Eq 1 is used when benefits predominate,
rate. (These topics are treated in Section 8 of Practice E917.)
and Eq 2 when a project’s primary advantage is lower costs.
8.7 The level of effort that goes into the evaluation may
range from an inexpensive, back-of-the-envelope calculation
intended to provide a ball-park estimate, to an expensive,
The NIST Building Life-Cycle Cost (BLCC) Computer Program helps users
detailed, thoroughly documented analysis intended to with-
calculate measures of worth for buildings and building components that are
stand scrutiny and to provide as much accuracy as possible.
consistent with ASTM standards. The program is downloadable from: http://
Different levels of effort are appropriate for different circum- www.eere.energy.gov/femp/information/download_blcc.html.
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E964−15 (2020)
N
NB = net benefits, and
t
¯
~B 2 C !/ 11i
~ !
( t t
N
t50
BCR 5 (1)
¯ ¯ t
N
NB 5 ~B 2 C 2 I !/~11i!
( t t t
t
¯ t50
I / 11i
~ !
( t
t50 NOTE 3—Investors may prefer in some cases a formulation of the ratio
that has a bias, as the term is used here, because they may wish to
where:
maximize the return on a particular type of fund. For example, current
BCR = benefit-to-cost ratio, account expenditures might be the constraining resource, and they might
wish to maximize the return on current account expenditures.
B = benefits in period t; that is, advantages in revenue or
t
performance, measured in dollars, of the building or
9.8 For ease of computation, instead of discounting the
system as compared with a mutually exclusive alter-
amount in each year and summing, as called for in Eq 1-3, the
native (See Note 1),
cashflowscanbegroupedintocategorieswiththesamepattern
¯ = costs in period t, excluding investment costs that are
C
of occurrence and discounted using discount factors. (How to
t
to be placed in the denominator for the building or
discount different patterns of cash flows is explained in the
system, less counterpart costs in period t for a
Section 9 of Practice E917.)
mutually exclusive alternative,
9.9 If income tax effects are a significant factor, they should
¯
= those investment costs in period t on which the
I
t
beincludedintheanalysis.(Incometaxadjustmentsaretreated
investor wishes to maximize the return, less similar
in Section 9 of Practice E917 and are illustrated in Appendix
investment costs in period t for a mutually exclusive
X1 of this practice.)
alternative, and
i = the discount rate.
10. Analysis of BCR or SIR Results and the Decision
NOTE 1—Mutually exclusive alternatives are those for which accepting
one automatically means not accepting the others. For a given project one
10.1 Take care to interpret correctly the results of the BCR
mutually exclusive alternative may be not to undertake the project. If so,
or SIR.
it is against this alternative that a potential investment must be compared
10.1.1 When a given, discretionary investment is compared
to determine its cost-effectiveness. Alternative designs and sizes of a
project for a given application are also mutually exclusive. against the alternative of doing nothing, a ratio greater than 1.0
indicates that the investment’s benefits or savings exceed its
N
t
S / 11i costs. This supports accepting the investment on economic
~ !
t
(
t50
grounds, as opposed to doing nothing. For example, an SIR
SIR 5 (2)
N
t
¯
greater than 1.0 on an investment in a central vacuuming
I / 11i
~ !
( t
t50
system for an office building indicates that the system is
estimated to be cost effective. The higher the ratio, the more
where:
economically attractive the investment. (Accepting or rejecting
SIR = savings-to-investment ratio, and
individual investments is treated further in 12.2.)
S = cost savings in period t, adjusted to include any
t
10.1.2 When comparing alternative designs or sizes of a
benefitsinperiod t,forthebuildingorbuildingsystem
given building or building system, the alternative with the
to be evaluated as compared with a mtually exclusive
highest BCR or SIR is usually not the most economic choice.
alternate.
For design and sizing decisions it is important to compute
That is:
incremental BCRs and SIRs by dividing the additional benefits
¯
or savings gained from an expansion in investment by the
S 5 B 2 C for t 50, …N
t t t
where:
additional investment cost. It pays to expand an investment as
N N N long as incremental benefits or savings from the expansion
¯ ¯
C . B and C ,0
U U
exceed incremental costs. Net benefits (or net savings) reach
( t ( t ( t
t50 t50 t50
their maximum when the incremental BCR or SIR equals 1.0.
NOTE 2—The BCR is normally used instead of the SIR unless cost
For example, if increasing the level of thermal insulation in a
reductions are much greater than revenue and performance advantages;
hence the use of the symbol >> in the definition of S. house from R-11 (resistance level = 11) to R-19 gives an
t
incremental SIR of 5.0, the increment is cost effective. If
9.6 When financing is included in the analysis, I is typically
further increasing the level of insulation from R-19 to R-30
set equal to investment costs paid up-front by the investor, that
gives an incremental SIR of 3.0, that increment is also cost
is, the downpayment paid out of equity funds. When financing
effective. And, if increasing the insulation from R-30 to R-38
is not included in the analysis, I is typically set equal to the
givesanincrementalSIRgreaterthan1.0,itpaystoexpandthe
total of investment costs.
level to R-38. (Project design and sizing is treated further in
9.7 Eq 3 is an alternative formulation of the BCR that gives
12.4.)
the same mathematical results as Eq 1:
10.1.3 Using BCRs or SIRs to assign priority among
N
independent, competing projects suggests the optimum
¯ t
NB1 I / 11i
S ~ ! D
t selection, but is not always a reliable approach. If project costs
(
t50
BCR 5 (3)
N are “lumpy” such that the budget cannot be used up exactly by
¯ t
I / 11i
~ ! adhering strictly to the BCR or SIR ranking, the optimum
t
(
t50
selection may differ from that indicated by the ratios. (Allo-
where: cating a budget is treated further in 12.3.)
ϵ1
E964−15 (2020)
10.2 In the final investment decision, take into account not 12. Applications
only the numerical values of the BCRs or SIRs, but also
12.1 The BCR and SIR methods can be used to indicate
uncertainty of investment alternatives relative to the risk
whether a given investment is economically attractive, to
attitudes of the investor, the availability of funding and other
choose among nonmutually exclusive projects competing for a
cash-flow constraints, any unquantified effects attributable to
limited budget, and to determine which engineering alternative
the alternatives, and the possibility of noneconomic objectives.
(that is, which project design or size) is most economically
(These topics are discussed in Section 10 of Practice E917.)
efficient. This practice gives six illustrations of applications of
10.2.1 Decision-makers typically experience uncertainty
the BCR and SIR methods. One is a detailed example of a real
about the correct values to use in establishing basic assump-
estateinvestmentproblem.ItappearsinAppendixX1.Another
tions and in estimating future costs. Guide E1369 recommends
is a detailed example of savings resulting from energy effi-
techniques for treating uncertainty in parameter values in an
ciency improvements in a high school building. It appears in
economicevaluation.Italsorecommendstechniquesforevalu-
AppendixX2.Theotherfourarebriefillustrationspresentedin
ating the risk that a project will have a less favorable economic
Tables 1-5.
outcome than what is desired or expected. Practice E1946
12.2 Accepting or Rejecting Individual Investments:
establishes a procedure for measuring cost risk for buildings
12.2.1 If an investment’s BCR or SIR is greater than 1.0, its
and building systems, using the Monte Carlo simulation
discounted benefits or savings exceed its discounted costs, and
techniqueasdescribedinGuideE1369.PracticeE917provides
it is economically attractive. On the other hand, if the ratio is
direction on how to apply Monte Carlo simulation when
less than 1.0, discounted benefits or savings are less than
performing economic evaluations of alternatives designed to
discounted costs, and it is not economically attractive.
mitigatetheeffectsofnaturalandman-madehazardsthatoccur
12.2.2 An illustration of the application of the BCR method
infrequently but have significant consequences. Practice E917
containsacomprehensiveexampleontheapplicationofMonte todecidewhethertoacceptaninvestmentinrealestateisgiven
in Appendix X1. The example shows the evaluation of an
Carlo simulation in evaluating the merits of alternative risk
mitigation strategies for a prototypical data center. investment in an apartment building. It is an after-tax
evaluation, and shows year-by-year cash flows. The BCR of
10.2.2 Describe any significant effects that remain unquan-
5.36meansthattherealestateinvestmentisestimatedtoreturn
tified. Explain how these effects impact the recommended
$5.36 for every dollar invested, over and above the minimum
alternative. Refer to Practice E1765 for guidance on how to
required rate of return imposed by the discount rate.
present unquantified effects along with the computed values of
the BCR, SIR, or any other measures of economic perfor- 12.2.3 Table 1 illustrates the application of the SIR method
mance. to evaluate three energy conservation projects. Evaluated
independently of one another, each project is cost effective as
11. BCR or SIR Report
indicated in Column 7 by SIRs greater than 1.0.
11.1 A report should document the BCR or SIR analysis.
12.3 Choosing Among Nonmutually Exclusive Projects
Key data and assumptions should be identified for each of the
Competing for a Limited Budget:
alternatives considered. Significant effects that remain unquan-
12.3.1 Asecond use of the BCR or SIR is to choose among
tified should be described in the report. And it should explain
nonmutuallyexclusiveprojectscompetingforalimitedbudget.
the basis for arriving at a decision. (This topic is discussed in
If there were no budget constraint, it would pay to accept all
more detail in Section 11 of Practice E917.)
projects whose discounted benefits or savings exceed their
discounted costs. With a budget constraint, it may not be
11.2 Guide E2204 presents a generic format for reporting
possible to accept all economically worthwhile projects, and a
the results of a BCR or SIR analysis. It provides technical
method of choosing among them is needed.
persons, analysts, and researchers a tool for communicating
results in a condensed format to management and non- 12.3.2 If the available budget can be fully exhausted by
technical persons. The generic format calls for a description of selecting projects in descending order of their BCRs or SIRs,
the significance of the project, the analysis strategy, a listing of the BCR or SIR method will provide a reliable guide for
data and assumptions, and a presentation of the computed
selectingprojects.Butif“lumpiness”inprojectcostsprecludes
values of the BCR, SIR, or any other measures of economic selecting projects exactly in descending order of their BCRs or
performance.
SIRs, the BCR or SIR can be used only as an indicator of
TABLE 1 Illustration of SIR to Evaluate Project Cost Effectiveness
(5) (6)
(2) (3) (4)
Savings Less Net Savings, (7)
(1)Projects Investment Energy Maintenance
B
A A
SIR
Future Costs, PV $ PV $
A A A
Costs, PV $ Savings, PV $ Cost, PV $
(5) = (3) − (4) (6)=(5)−(2)
A 1000 6000 2300 3700 2700 3.70
B 1000 3800 0 3800 2800 3.80
C 1000 3000 −600 3600 2600 3.60
A
PV $ = present value dollars.
B
Calculated according to Eq 2; for example, for project alternative A, SIR = ($6000 − $2300) ⁄$1000 = 3.70.
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TABLE 2 Illustration of SIR Ranking
higher-ranked project and select lower-ranked projects with
(4) ratios greater than 1.0 until the budget is exhausted.
(2)
(3) Net (6)
Alternatively, it may pay to drop projects already selected
(1) Investment (5)
Savings, SIR
Savings,
Project Costs, SIR
A
A rather than pass over a project to take lower-ranked projects.
PV $ PV $ Ranking
A
PV $
(4) = (3) − (2)
12.3.7 When the budget cannot be completely exhausted by
A 10 000 8 500 −1500 0.85 6
strictly following the ratio ranking, it is sound practice to test
B 30 000 33 220 3220 1.11 3
different combinations of projects on a trial-and-error basis
C 5 000 6 660 1660 1.33 1
D 40 000 42 550 2550 1.06 5
until the combination is found for which aggregate net benefits
E 90 000 96 250 6250 1.07 4
or net savings are maximized for the given budget. This may
F 10 000 12 620 2620 1.26 2
involve holding back part of the budget if it cannot be spent in
G 45 000 49 840 4840 1.11 3
such a way that aggregate net benefits or net savings increase
A
PV $ = present value dollars.
with its expenditure.
NOTE 4—In evaluating multiple projects, the problem of interdepen-
TABLE 3 Project Data
dency among projects may arise; that is, undertaking one project may
(2) affect the relative life-cycle costs and savings of remaining projects. For
(1) Total (3) (4) (5)
example, the value of adding an automatic environmental control system
Project Size Investment Project Life, Total Net
will be different depending on the level of insulation in the building
Alternatives Required, years Benefits, $ Benefits, $
envelope and vice versa. Undertaking one will tend to diminish the value
$
of the other. A simultaneous solution would be ideal.
00 0 0 0
A practical approach often used to approximate the combination of
A 100 000 20 500 000 400 000
interdependent projects that maximizes aggregate net benefits or net
B 125 000 20 575 000 450 000
savings is to evaluate each of the candidate projects independently of one
C 145 000 20 600 000 455 000
another, select the one with the highest BCR or SIR, and then adjust the
D 155 000 20 605 000 450 000
BCR or SIR on any remaining projects that are expected to be substan-
tially altered by the first, higher-priority selection. The selection process
can then be continued, with necessary adjustments to the BCRs or SIRs of
A
TABLE 4 BCRs for Project Size Changes
all projects, as each additional selection is made. The need to find optimal
(2) (3) (4) (5) (6) combinations of interdependent projects may arise even if there is no
(1)
To Size
budget constraint.
From Size
0A B C D
12.4 Selecting Among Alternative Engineering Alternatives:
0 . . . 5.0 4.6 4.1 3.9
12.4.1 A third application of the BCR or SIR method is to
A . . 3.0 2.2 1.9
B . . . 1.3 1.0
determine which project size or design is most efficient (that is,
C . . . . 0.5
which engineering alternative maximizes net benefits or net
A
Based on data in Table 3.
savings). Determination of a dam’s height and capacity is an
example of sizing. Selecting among single, double, or triple
glazing is an example of choosing the appropriate design.
12.4.2 Ifthereisnobudgetlimitationforagivenproject,the
potential economic combinations of projects. In this case,
most efficient size or design occurs when the ratio of incre-
potential combinations must be tested on a trial-and-error basis
mental benefits or savings to incremental costs equals (or
to determine which combination maximizes aggregate net
approximates) 1.0 for the last unit of investment (that is, when
benefits or net savings.
marginal benefits equal marginal costs).
12.3.3 Table 2 illustrates the use of the SIR by a public
12.4.3 Tables3and4togetherillustratehowprojectsizecan
agency to choose among potential investments in energy
be selected on the basis of incremental BCR analysis. Table 3
conservation. Seven independent projects (A through G) for
presents five size alternatives (zero and A through D) for a
different buildings are listed with their corresponding savings
project, and corresponding total costs, total benefits, and net
and costs. Column 6 ranks the projects by their SIR values.
benefits.An inspection of net benefits in Column 5 shows that
12.3.4 To maximize net savings, the agency will undertake
Size C maximizes net benefits and, hence, is the economically
projects in descending order of their SIRs until the budget is
efficient choice in the absence of a budget constraint. This
exhausted. For example, if the budget were $90 000, Projects
provides the correct solution against which to compare the
C, F, G, and B would be selected. No other combination of
results of the incremental BCR analysis in Table 4.
projects for that budget could produce a greater net savings.
12.4.4 Table 4 shows the BCRs for all possible size changes
12.3.5 If the SIRs fall below 1.0 before the available budget
for the alternatives described in Table 3. Table 4 is read by row
is exhausted, then project acceptance should terminate with the
and from left to right. By comparing each size against a zero
last project whose SIR exceeds 1.0. For example, a budget of
baseline,thetoprowgives,ineffect,BCRsontotalinvestment.
$230 000 or more would allow accepting all projects in Table
Although SizeAhas the highest BCR (5), it is not the size that
2 except ProjectAwhich has an SIR less than 1.0. ProjectAis
givesthehighestnetbenefits.(ThismaybeconfirmedbyTable
notcosteffectiveandwouldberejectedevenifthebudgetwere
3 which shows that net benefits from the project in Size C are
sufficiently large to fund it.
$55 000 more than net benefits from the project in Size A.)
12.3.6 If a higher-ranked project costs more than the avail-
able budget while lower-ranked projects are still affordable 12.4.5 Subsequent rows of Table 4 give the incremental
within the available budget, it may pay to skip over the BCRs calculated on differences between project sizes other
ϵ1
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A
TABLE 5 Allocating a Budget Among Projects of Alternative Size
(3)
(4)
(2) (5) (6)
(1) Cumulative (7)
Energy
Investment Net Savings SIR
C
Investment Alternative Investment, Ranking
Savings,
B B
Cost, PV $ B (5) = (4) − (2), PV $ (6) = (4) ⁄(2)
B
PV $
PV $
Add R-8 insulation 400 400 5000 4600 12.5 1
Increase insulation from R-8 to R-19 250 650 1600 1350 6.4 2
Add storm windows on north side 800 1450 3200 2400 4.0 3
Increase insulation from R-19 to R-30 250 1700 600 350 2.4 4
Add solar water heater 1500 3200 3300 1800 2.2 5
Add storm windows on south side 800 4000 1200 400 1.5 6
Increase insulation from R-30 to R-38 200 4200 250 50 1.3 7
Replace furnace 2500 6700 2750 250 1.1 8
A
This example is solely for the purpose of illustrating use of the SIR method for making decisions. The costs and savings data are purely hypothetical.
B
PV $ = present value dollars.
C
Based on a 15 year holding period for the building with no residual value.
than zero. For example, the incremental BCR associated with they are computed on the smallest feasible unit of each project.
expanding project size fromAto B is 3.0; fromAto C, 2.2 (see With an unlimited budget, the homeowner is advised to
Note 5); from A to D, 1.9; and from B to C, 1.3. The last size approve all four retrofits in their largest investment sizes. But
increment (that is, from C to D) is not cost effective as with a limited budget of say, $1500, the cost-effective combi-
indicated by the incremental BCR of 0.5. Size C is the last
nation of projects is to place R-19 insulation in the attic and
separable increment with an incremental BCR equal to or
install storm windows on the north side. Note that in selecting
greater than 1.0. Thus, in the absence of a budget constraint, C
a level of insulation of R-19, a sizing decision is made.
is the size that maximizes net benefits.
Investment costs for the combination selected total $1450, and
savings, $9800. No other combination of projects within the
NOTE 5—The calculation of BCR from A to C, for example, is:
budget provides savings as great as $9800. (The $50 of the
$600000 2 $500000 / $145000 2 $100000 5 2.2.
~ ! ~ !
budget unallocated is assumed to be invested at the rate of
12.5 Allocating a Budget Among Projects of Variable De-
return available on the next best investment (that is, at the
sign and Size: opportunity cost of capital as measured by the discount rate),
12.5.1 Sizing and designing individual projects and select-
and, therefore, adds nothing to net benefits.)
ing among them when the budget is limited often should be a
12.5.3 When taking a joint approach to designing, sizing,
joint decision. A practical approach is to set up design and
and selecting projects for a limited budget, it is important to
sizing decisions when possible in the same context as the
define appropriately the budget in order to avoid under-
budget allocation decision. This can be done by constructing
designing and under-sizing individual projects. For example,
theprobleminsuchamannerthatdecidinghowmuchtospend
the manager of a building who receives a series of annual
on given projects and which projects to select occurs simulta-
budgetswouldlikelyunder-designandunder-sizeprojectsifhe
neously.
or she focused on maximizing the return to each individual
12.5.2 Table 5 illustrates the approach for a home improve-
budget. In contrast, a consultant called in to specify what is to
ment firm that is showing a prospective customer the most
be done in a one-time retrofit of a building for energy
efficient set of retrofit alternatives for energy conservation.
conservation appropriately focuses on a single budget.
Candidate retrofits are to insulate the attic, which is currently
12.5.4 A second-best approach, which tends towards over-
uninsulated, add storm windows, add a solar hot-water heater,
designing and over-sizing when there is a budget constraint, is
and replace the furnace with a high efficiency unit. The
to design and size each project so that the incremental ratio is
insulation project is divided into four size increments: (1) add
equal to 1.0 (that is, as though there is no budget constraint),
insulation to a level sufficient to achieve a resistance value of
and then select projects as before in descending order of BCRs
8 (that is, R-8), (2) increase the level from R-8 to R-19, (3)
or SIRs computed on total project costs and benefits until the
increase the level from R-19 to R-30, and (4) increase the level
budget is exhausted. This approach may be appropriate for
from R-30 to R-38. The storm window project is divided into
allocating a series of related budgets.
two separately fundable parts: (1) add storm windows on the
north side, and (2) add them on the south side. Dividing the
13. Keywords
windowprojectaccordingtoorientationofthewindowsmakes
sense because orientation affects the cost effectiveness of the 13.1 benefit-cost analysis; benefit-to-cost ratio; building
investment. The options are arrayed in Table 5 in descending economics; engineering economics; investment analysis;
order of their SIRs. The SIRs are all incremental SIRs because savings-to-investment ratio
ϵ1
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APPENDIXES
(Nonmandatory Information)
X1. USING THE BCR TO EVALUATE A REAL ESTATE INVESTMENT: ILLUSTRATION
X1.1 Problem Statement—Arealty partnership must decide X1.7 Selection of the BCR Method—Although the net
whether or not to purchase an apartment building. benefits and internal rate-of-return methods are more often
used to evaluate real estate investments, the BCR can also be
X1.2 Objectives—The partnership is seeking profitable real
used to measure profitability. By formulating the BCR with
estate investments that will more than compensate for its
equity funds (the downpayment) in the denominator, the ratio
estimatedopportunitycostof12 %aftertaxes,withoutincreas-
willmeasurethediscountedproceedsperdollarofequityfunds
ing average risk of the investment portfolio.
invested.
X1.3 Constraints—The partnership has 2 million dollars on
X1.8 BCR Computation—Tables X1.2-X1.6 show the year-
hand to invest. Its target holding period for property is five
by-year cash-flow analysis and the computation of present
years.
values. The illustration splits the benefits and costs into
components, provides an after-tax analysis, and shows year-
X1.4 Terms—The price of the apartment building is 10
by-year cash flow. Table X1.7 shows the calculation of the
million dollars. The seller is willing to finance 80 % of the
BCR. The ratio is 5.36.
price over five years at an interest rate of 10 %, with uniform
payments at the end of each year.
X1.9 Decision—A BCR value of 5.36 means that after-tax
proceeds are estimated to be more than $5.00 for every dollar
X1.5 Alternatives Considered:
of equity funds invested, over and above the required 12 %
X1.5.1 Purchase and operate the apartment house for 5
after-tax rate of return. Hence, the investment appears attrac-
years and then sell it.
tiveoneconomicgrounds,andthedecisionistoacceptit.Note
that part of the positive economic performance is due to the
X1.5.2 Do not invest in the apartment house.
favorable terms of financing and part to the building. Because
X1.6 Data andAssumptions—Dataandassumptionsneeded the terms of financing are integral to the investment package, it
to evaluate the decision are summarized in Table X1.1. is appropriate to include financing in this analysis.
TABLE X1.1 Data and Assumptions for Real Estate Example
Study period (investor’s holding period), years 5
Discount rate, after taxes (includes estimated 12
inflation rate), %
Inflation rate (annual rate of general price change), % 5
Investment cost data:
Purchase price: $10 000 000
Land $2 500 000
Improvements $7 500 000
Downpayment (20 % of purchase price) $2 000 000
Loan (80 % of purchase price) $8 000 000
Loan interest rate, % 10
Loan life, years 5
Yearly loan payment ($8 million loan amortized $2 110 400
over 5 years at 10 %)
Depreciation period, years 27.5
Depreciation amount (straight-line method) per year $272 727
Income tax treatment of loan interest fully deductible
Resale of building (net of selling costs) at the $12 100 000
end of 5 years
Operating costs:
Yearly costs, initially including maintenance, energy, $1 200 000
trash removal, insurance, real estate taxes, etc.
Rental revenue:
Initial yearly rent from residential tenants $4 200 000
Initial yearly lease revenue from concessions $500 000
Yearly rate of increase, % 8
Federal income tax rate, % 28
State income tax rate, % 4
A
Combined tax rate, % 30.9
A
Taking into account the deductibility of state tax from federal tax liability, the
combined tax rate is calculated as 0.28 (1 − 0.04) + 0.04 = 0.309.
ϵ1
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TABLE X1.2 Calculation of Financed Investment Costs After Tax Deductions for Interest, in Present Value Dollars
(5)
(6)
(8)
(2) Income Tax Reductions
(3) (4) After-Tax (7) Financed
(1) Yearly from
A B
Income Tax Loan Payment,
Interest Payments, SPV Investment Costs
Year Load Payment, Interest Deductions,
C
current $ Rate current $ Factor
After-Taxes, PV $
current $ current $
(8) = (6) × (7)
(6) = (2) − (5)
(5) = (3) × (4)
0 . . . . . . .
1 2 110 400 800 000 0.309 247 200 1 863 200 0.8929 1 663 651
2 2 110 400 668 960 0.309 206 709 1 903 691 0.7972 1 517 622
3 2 110 400 524 816 0.309 169 168 1 948 232 0.7118 1 386 752
4 2 110 400 366 258 0.309 113 174 1 997 226 0.6355 1 269 237
5 2 110 400 191 843 0.309 59 279 2 051 121 0.5674 1 163 806
PV of Financed Investment Costs after Deductions for Loan Interest: 7 001 068
A
Interest payment, = remaining principal, × interest rate, and remaining principal, = remaining principal − (loan payment − interest payment ).
t t t t−1 t−1
B
SPV = Single present value (or worth) discount factor from “Discount Factor Tables,” the Adjunct to Practice E917, based on a 12 % discount rate.
C
PV $ = Present value dollars.
TABLE X1.3 Calculation of Income Tax Savings Due to Depreciation Write-Off, in Present Value Dollars
(4)
(6)
Yearly
(2) (3)
Income Tax Savings
(1) Income Tax Savings (5)
Yearly Depreciation, Combined
Due to Depreciation
B
Year Due to Depreciation SPV Factor
A
C
current $ Income Tax Rate
Write-Off, PV $
Write-Off, current $
(6) = (4) × (5)
(4) = (2) × (3)
0 . . . . .
1 272 727 0.309 84 273 0.8929 75 247
2 272 727 0.309 84 273 0.7972 67 182
3 272 727 0.309 84 273 0.7118 59 985
4 272 727 0.309 84 273 0.6355 53 555
5 272 727 0.309 84 273 0.5674 47 817
PV of Total Income Tax Savings Due to Depreciation Write-Off: 303 787
A
Based on straight-line depreciation of $7.5 million in capital improvements over 27.5 years. The yearly depreciation is tied to historical costs and does not change with
general price inflation. Because the amount is fixed in current dollars, inflation erodes the constant dollar value of the depreciation allowance.
B
SPV = Single present value (or worth) discount factor from “Discount Factor Tables,” the Adjunct to Practice E917, based on a 12 % discount rate.
C
PV $ = present value dollars.
TABLE X1.4 Calculation of Operating Costs After Taxes, in Present Value Dollars
(6)
(3) (7)
(4) Tax Reduc
...