ASTM E1369-07e2
(Guide)Standard Guide for Selecting Techniques for Treating Uncertainty and Risk in the Economic Evaluation of Buildings and Building Systems
Standard Guide for Selecting Techniques for Treating Uncertainty and Risk in the Economic Evaluation of Buildings and Building Systems
SIGNIFICANCE AND USE
Investments in long-lived projects such as buildings are characterized by uncertainties regarding project life, operation and maintenance costs, revenues, and other factors that affect project economics. Since future values of these variable factors are generally not known, it is difficult to make reliable economic evaluations.
The traditional approach to project investment analysis has been to apply economic methods of project evaluation to best-guess estimates of project input variables as if they were certain estimates and then to present results in single-value, deterministic terms. When projects are evaluated without regard to uncertainty of inputs to the analysis, decision makers may have insufficient information to measure and evaluate the risk of investing in a project having a different outcome from what is expected.
Risk analysis is the body of theory and practice that has evolved to help decision makers assess their risk exposures and risk attitudes so that the investment that is the best bet for them can be selected.
Note 1—The decision maker is the individual or group of individuals responsible for the investment decision. For example, the decision maker may be the chief executive officer or the board of directors.
Uncertainty and risk are defined as follows. Uncertainty (or certainty) refers to a state of knowledge about the variable inputs to an economic analysis. If the decision maker is unsure of input values, there is uncertainty. If the decision maker is sure, there is certainty. Risk refers either to risk exposure or risk attitude.
Risk exposure is the probability of investing in a project that will have a less favorable economic outcome than what is desired (the target) or is expected.
Risk attitude, also called risk preference, is the willingness of a decision maker to take a chance or gamble on an investment of uncertain outcome. The implications of decision makers having different risk attitudes is that a given investment of know...
SCOPE
1.1 This guide covers techniques for treating uncertainty in input values to an economic analysis of a building investment project. It also recommends techniques for evaluating the risk that a project will have a less favorable economic outcome than what is desired or expected.
1.2 The techniques include breakeven analysis, sensitivity analysis, risk-adjusted discounting, the mean-variance criterion and coefficient of variation, decision analysis, and simulation.
1.3 The techniques can be used with economic methods that measure economic performance, such as life-cycle cost analysis, net benefits, the benefit-to-cost ratio, internal rate of return, and payback.
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´2
Designation: E1369 – 07
Standard Guide for
Selecting Techniques for Treating Uncertainty and Risk in
the Economic Evaluation of Buildings and Building
1
Systems
This standard is issued under the fixed designation E1369; the number immediately following the designation indicates the year of
original adoption or, in the case of revision, the year of last revision.Anumber in parentheses indicates the year of last reapproval.A
superscript epsilon (´) indicates an editorial change since the last revision or reapproval.
1
´ NOTE—Footnotes updated editorially in August 2007.
2
´ NOTE—Section 2.2 and Footnote 5 were editorially corrected and Section 12 was editorially added in January 2009.
1. Scope E1057 Practice for Measuring Internal Rate of Return and
Adjusted Internal Rate of Return for Investments in Build-
1.1 This guide covers techniques for treating uncertainty in
ings and Building Systems
input values to an economic analysis of a building investment
E1074 PracticeforMeasuringNetBenefitsandNetSavings
project. It also recommends techniques for evaluating the risk
for Investments in Buildings and Building Systems
thataprojectwillhavealessfavorableeconomicoutcomethan
2 E1121 Practice for Measuring Payback for Investments in
what is desired or expected.
Buildings and Building Systems
1.2 The techniques include breakeven analysis, sensitivity
E1185 Guide for Selecting Economic Methods for Evaluat-
analysis,risk-adjusteddiscounting,themean-variancecriterion
ing Investments in Buildings and Building Systems
and coefficient of variation, decision analysis, and simulation.
2.2 Adjuncts:
1.3 Thetechniquescanbeusedwitheconomicmethodsthat
Discount FactorTables, Adjunct to Practices E917, E964,
measure economic performance, such as life-cycle cost analy-
4
E1057, E1074, and E1121
sis,netbenefits,thebenefit-to-costratio,internalrateofreturn,
and payback.
3. Terminology
2. Referenced Documents 3.1 Definitions—For definitions of terms used in this guide,
3
refer to Terminologies E631 and E833.
2.1 ASTM Standards:
E631 Terminology of Building Constructions
4. Summary of Guide
E833 Terminology of Building Economics
4.1 This guide identifies related ASTM standards and ad-
E917 Practice for Measuring Life-Cycle Costs of Buildings
juncts. It describes circumstances when measuring uncertainty
and Building Systems
and risk may be helpful in economic evaluations of building
E964 Practice for Measuring Benefit-to-Cost and Savings-
investments.This guide defines uncertainty, risk exposure, and
to-Investment Ratios for Buildings and Building Systems
risk attitude. It presents nonprobabilistic and probabilistic
techniques for measuring uncertainty and risk exposure. This
1
This guide is under the jurisdiction ofASTM Committee E06 on Performance guide describes briefly each technique, gives the formula for
of Buildings and is the direct responsibility of Subcommittee E06.81 on Building
calculating a measure where appropriate, illustrates the tech-
Economics.
niques with a case example, and summarizes its advantages
Current edition approved April 1, 2007. Published April 2007. Originally
and disadvantages.
approved in 1990. Last previous edition approved in 2002 as E1369–02. DOI:
10.1520/E1369-07E02.
4.2 Since there is no best technique for measuring uncer-
2
For an extensive overview of techniques for treating risk and uncertainty, see
tainty and risk in every economic evaluation, this guide
Marshall, Harold E.—Techniques for Treating Uncertainty and Risk in the Eco-
concludes with a discussion of how to select the appropriate
nomic Evaluation of Building Investments, National Institute of Standards and
Technology, Special Publication 757, 1988. technique for a particular problem.
3
For referenced ASTM standards, visit the ASTM website, www.astm.org, or
contact ASTM Customer Service at service@astm.org. For Annual Book of ASTM
4
Standards volume information, refer to the standard’s Document Summary page on Available from ASTM International Headquarters. Order Adjunct No.
the ASTM website. ADJE091703.
Copyright © ASTM International, 100 Barr Harbor Drive, PO Box C700, West Conshohocken, PA 19428-2959, United States.
1
---------------------- Page: 1 ----------------------
´2
E1369 – 07
4.3 This guide describes in detail how risk exposure can be 6. Procedures
measured by probability functions and distribution functions
6.1 The recommended steps for carrying out an evaluation
(see Annex A1). It also describes how risk attitude can be
of uncertainty or risk are as follows:
incorporated using utility theory and other approaches (see
6.1.1 Determine appropriate economic measure(s) for
Annex A2).
evaluating the investment (see Guide E1185).
6.1.2 Identify objectives, alternatives, and constraints (see
5. Significance and Use
Practices E917, E964, E1057, E1074, and E1121).
5.1 Investment
...
This document is not anASTM standard and is intended only to provide the user of anASTM standard an indication of what changes have been made to the previous version. Because
it may not be technically possible to adequately depict all changes accurately, ASTM recommends that users consult prior editions as appropriate. In all cases only the current version
of the standard as published by ASTM is to be considered the official document.
´2
Designation:E1369–02 Designation: E 1369 – 07
Standard Guide for
Selecting Techniques for Treating Uncertainty and Risk in
the Economic Evaluation of Buildings and Building
1
Systems
This standard is issued under the fixed designation E1369; the number immediately following the designation indicates the year of
original adoption or, in the case of revision, the year of last revision.Anumber in parentheses indicates the year of last reapproval.A
superscript epsilon (´) indicates an editorial change since the last revision or reapproval.
1
´ NOTE—Footnotes updated editorially in August 2007.
2
´ NOTE—Section 2.2 and Footnote 5 were editorially corrected and Section 12 was editorially added in January 2009.
1. Scope
1.1 This guide recommendscovers techniques for treating uncertainty in input values to an economic analysis of a building
investment project. It also recommends techniques for evaluating the risk that a project will have a less favorable economic
2
outcome than what is desired or expected.
1.2 The techniques include breakeven analysis, sensitivity analysis, risk-adjusted discounting, the mean-variance criterion and
coefficient of variation, decision analysis, and simulation.
1.3 The techniques can be used with economic methods that measure economic performance, such as life-cycle cost analysis,
net benefits, the benefit-to-cost ratio, internal rate of return, and payback.
2. Referenced Documents
3
2.1 ASTM Standards:
E631 Terminology of Building Constructions
E833 Terminology of Building Economics
E917 Practice for Measuring Life-Cycle Costs of Buildings and Building Systems
E964 Practice for Measuring Benefit-to-Cost and Savings-to-Investment Ratios for Buildings and Building Systems
E1057 Practice for Measuring Internal Rate of Return andAdjusted Internal Rate of Return for Investments in Buildings and
Building Systems
E1074 Practice for Measuring Net Benefits and Net Savings for Investments in Buildings and Building Systems
E1121 Practice for Measuring Payback for Investments in Buildings and Building Systems
E1185 Guide for Selecting Economic Methods for Evaluating Investments in Buildings and Building Systems
2.2 ASTM Adjuncts:
Discount Factor Tables, Adjunct to Practice E917 Adjuncts:
4
Discount FactorTables, Adjunct to Practices E917, E964, E1057, E1074, and E1121
3. Terminology
3.1 Definitions—For definitions of terms used in this guide, refer to Terminology E833Terminologies E631 and E833.
4. Summary of Guide
4.1 ThisguideidentifiesrelatedASTMstandardsandadjuncts.Itdescribescircumstanceswhenmeasuringuncertaintyandrisk
may be helpful in economic evaluations of building investments. This guide defines uncertainty, risk exposure, and risk attitude.
It presents nonprobabilistic and probabilistic techniques for measuring uncertainty and risk exposure.This guide describes briefly
each technique, gives the formula for calculating a measure where appropriate, illustrates the techniques with a case example, and
1
This guide is under the jurisdiction of ASTM Committee E06 on Performance of Buildings and is the direct responsibility of Subcommittee E06.81 on Building
Economics.
Current edition approved Oct. 10, 2002. Published November 2002. Originally published as E1369–90. Last previous edition E1369–98.
Current edition approved April 1, 2007. Published April 2007. Originally approved in 1990. Last previous edition approved in 2002 as E1369–02.
2
For an extensive overview of techniques for treating risk and uncertainty, see Marshall, Harold E.—Techniques for Treating Uncertainty and Risk in the Economic
Evaluation of Building Investments, National Institute of Standards and Technology, Special Publication 757, 1988.
3
ForreferencedASTMstandards,visittheASTMwebsite,www.astm.org,orcontactASTMCustomerServiceatservice@astm.org.For Annual Book of ASTM Standards
, Vol 04.11.volume information, refer to the standard’s Document Summary page on the ASTM website.
4
Available from ASTM Headquarters. Order PCN 12-509179-10.
4
Available from ASTM International Headquarters. Order Adjunct No. ADJE091703.
Copyright © ASTM International, 100 Barr Harbor Drive, PO Box C700, West Conshohocken, PA 19428-2959, United States.
1
---------------------- Page: 1 ----------------------
´2
E1369–07
summarizes its advantages and disadvantages.
4.2 Sincethereisnobesttechniqueformeasuringuncertaintyandriskineveryeconomicevaluation,thisguideconcludeswith
a discussion of how to select the appropriate technique for a particular problem.
4.3 This guide describes in detail how risk exposure can be measur
...
This document is not anASTM standard and is intended only to provide the user of anASTM standard an indication of what changes have been made to the previous version. Because
it may not be technically possible to adequately depict all changes accurately, ASTM recommends that users consult prior editions as appropriate. In all cases only the current version
of the standard as published by ASTM is to be considered the official document.
´1 ´1
Designation: E 1369 – 07 E1369–07 ´2
Standard Guide for
Selecting Techniques for Treating Uncertainty and Risk in
the Economic Evaluation of Buildings and Building
1
Systems
This standard is issued under the fixed designation E1369; the number immediately following the designation indicates the year of
original adoption or, in the case of revision, the year of last revision.Anumber in parentheses indicates the year of last reapproval.A
superscript epsilon (´) indicates an editorial change since the last revision or reapproval.
1
´ NOTE—Footnotes updated editorially in August 2007.
—Footnotes updated editorially in August 2007.
2
´ NOTE—Section 2.2 and Footnote 5 were editorially corrected and Section 12 was editorially added in January 2009.
1. Scope
1.1 This guide covers techniques for treating uncertainty in input values to an economic analysis of a building investment
project.Italsorecommendstechniquesforevaluatingtheriskthataprojectwillhavealessfavorableeconomicoutcomethanwhat
2
is desired or expected.
1.2 The techniques include breakeven analysis, sensitivity analysis, risk-adjusted discounting, the mean-variance criterion and
coefficient of variation, decision analysis, and simulation.
1.3 The techniques can be used with economic methods that measure economic performance, such as life-cycle cost analysis,
net benefits, the benefit-to-cost ratio, internal rate of return, and payback.
2. Referenced Documents
3
2.1 ASTM Standards:
E631 Terminology of Building Constructions
E833 Terminology of Building Economics
E917 Practice for Measuring Life-Cycle Costs of Buildings and Building Systems
E964 Practice for Measuring Benefit-to-Cost and Savings-to-Investment Ratios for Buildings and Building Systems
E1057 Practice for Measuring Internal Rate of Return andAdjusted Internal Rate of Return for Investments in Buildings and
Building Systems
E1074 Practice for Measuring Net Benefits and Net Savings for Investments in Buildings and Building Systems
E1121 Practice for Measuring Payback for Investments in Buildings and Building Systems
E1185 Guide for Selecting Economic Methods for Evaluating Investments in Buildings and Building Systems
2.2 ASTM Adjuncts:
Discount Factor Tables, Adjunct to Practice E917 Adjuncts:
4
Discount FactorTables, Adjunct to Practices E917, E964, E1057, E1074, and E1121
3. Terminology
3.1 Definitions—For definitions of terms used in this guide, refer to Terminologies E631 and E833.
4. Summary of Guide
4.1 ThisguideidentifiesrelatedASTMstandardsandadjuncts.Itdescribescircumstanceswhenmeasuringuncertaintyandrisk
may be helpful in economic evaluations of building investments. This guide defines uncertainty, risk exposure, and risk attitude.
It presents nonprobabilistic and probabilistic techniques for measuring uncertainty and risk exposure.This guide describes briefly
each technique, gives the formula for calculating a measure where appropriate, illustrates the techniques with a case example, and
1
This guide is under the jurisdiction of ASTM Committee E06 on Performance of Buildings and is the direct responsibility of Subcommittee E06.81 on Building
Economics.
Current edition approved April 1, 2007. Published April 2007. Originally approved in 1990. Last previous edition approved in 2002 as E1369–02.
2
For an extensive overview of techniques for treating risk and uncertainty, see Marshall, Harold E.—Techniques for Treating Uncertainty and Risk in the Economic
Evaluation of Building Investments, National Institute of Standards and Technology, Special Publication 757, 1988.
3
ForreferencedASTMstandards,visittheASTMwebsite,www.astm.org,orcontactASTMCustomerServiceatservice@astm.org.For Annual Book of ASTM Standards
volume information, refer to the standard’s Document Summary page on the ASTM website.
4
Available from ASTM International Headquarters. Order Adjunct No. ADJE091703.
Copyright © ASTM International, 100 Barr Harbor Drive, PO Box C700, West Conshohocken, PA 19428-2959, United States.
1
---------------------- Page: 1 ----------------------
´2
summarizes its advantages and disadvantages.
4.2 Sincethereisnobesttechniqueformeasuringuncertaintyandriskineveryeconomicevaluation,thisguideconcludeswith
a discussion of how to select the appropriate technique for a particular problem.
4.3 This guide describes in detail how risk exposure can be measured by probability functions and distribution functions (see
Annex A1). It also describes how risk attitude can be incorporated using utility theory and other approaches (see Annex A2).
5. Significance and Use
5.1 Inves
...
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