LAS FRUTAS SILVESTRES

2.8.1 Calculating Present Value

Fuller & Petersen (1996) and Clift, (2003)state the extent of data input required for LCC exercises is more complex than that required for assessing initial costs or short term considerations. The reason for this is that the scope of the analysis, in relation to time and economic considerations, is considerably longer. LCC is a method for condensing an almost overwhelming large quantity of information, over a long period of time, into one economic figure (Pelzeter, 2007).Costs that fall outside the scope of pure construction CAPex are also considered such as maintenance costs; replacement costs; occupancy costs, and utilities costs (BS-ISO, 2008, pp. 6-7; Fu et

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al., 2007). The expansive scope of the LCC study and the additional cost and time factors employed in the calculations can make considering LCC on construction projects very time consuming (Fu et al., 2007; Hunter et al., 2005).

Certain data requirements need to be applied to carry out the NPV calculations in LCC. NPV calculations for LCC incorporate escalation and discount rates to account for different operations taking place at different times throughout the built asset’s life cycle (Cole & Sterner, 2000; Fuller & Peterson, 1996; TG4, 2003). This enables the cost consultant to evaluate different systems and building options over a selected study period even though their replacement and maintenance profiles may be significantly different (Ashworth, 1996; Kelly & Hunter, 2009; Kirkham, 2005).

2.8.2 Escalation/Inflation Rates

When LCCs are expressed in ‘nominal’ costs, the costs are adjusted for inflation, representing the ‘current costs’ at the time the cost is incurred (BSI/BCIS, 2008; Charette, 2010; Churcher, 2008). To do this, LCC calculations incorporate an escalation rate to take account of the rise in the general price level of the item that is being analysed to the future date the cost will be incurred (Hunter et al., 2005). Hunter et al. (2005) describe how assessing escalation becomes harder when the rise differs across products. Different products and services escalate at different levels even though a general inflation rate in the construction sector may be reported and applied. Taking account of different escalation rates adds complexity to the calculations as a single rate cannot be applied to the entire LCC assessment (Davis Langdon, 2007). Nominal costs can be presented in an LCC estimate and represent the future costs prior to them being discounted for NPV (BS-ISO, 2008; Churcher, 2008).

2.8.3 Discount Rates

The discount rate, on the other hand, is usually a universal rate applied to the LCC analysis. Churcher (2008) and Fuller & Petersen (1996) state that a discount rate takes account of the time value of money. The principle of time value means that cash available now has a greater value than the same quantity of cash in the future (Churcher, 2008). For example, the spending power of a quantity of cash will be less in ten years’ time. LCC discounts future sums with a discount rate into present day money or a comparable time base for evaluation purposes (Kelly & Hunter, 2009).

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Discussed in Section 2.7.2, Fuller and Petersen (1996) outline this comparable date as the ‘base date’ while Kelly & Hunter (2009)describe it as ‘year zero (0)’.

2.8.4 Choosing a Discount Rate

Discount rates can be expressed as ‘real’ and ‘nominal’ depending on whether escalation is included in the rate (BSI/BCIS, 2008; TG4, 2003). Real discount rates are already adjusted for inflation and assume that a standard rate of inflation applies equally to all items in the estimate (BS-ISO, 2008; BSI/BCIS, 2008; Kelly & Hunter, 2009). As inflation is already factored into the real discount rate, escalation rates are not applied when real discount rates are used in LCC calculations. Nominal discount rates do not include the escalation rate in the discount rate, thus escalation rates are applied as a separate rate in calculations that include nominal discount rates (Charette, 2010; Churcher, 2008). BSI/BCIS (2008) and Fuller & Petersen (1996) recommend the use of real discount rates. They note that using real discount rates increases the speed of calculating LCC. However, this limits LCC being expressed solely as ‘present value’ rather than ‘nominal cost’ and representing LCC as nominal costs may be a requirement by the client. The RICS (2014) acknowledge that there are various views on how to account for inflation in discount rates. The RICS (2014) state that contrasting views make it difficult to prescribe advice on which type of discount rate to apply. Given these divergent views, the most valuable way to calculate LCC would be to use a tool that can represent the costs in real costs, nominal costs and present value, thus selecting the preferred LCC representation depending on project requirements, client requirements and the methodology being used. The OGC (2007) state that whatever way the estimate is presented, it should be used consistently.

The BSI/BCIS (2008) outline that the discount rate selected for public projects is usually quoted by central government. The current edition of HM Treasury’s Green Book in UK, presents the discount rate to be used for all LCC analysis periods of thirty years or less (RICS, 2015). In Ireland discount rates and inflation rates are listed on the Department of Public Expenditure and Reform’s website (DPER) (Kehily, 2011). The rates are listed as nominal discount rates, which indicate a separate treatment of inflation. The website advises that on public construction projects a government technical adviser will quote a prescribed inflation rate based on the context of a particular project.

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2.8.5 Study Period (Period of Analysis)

The ‘study period’ is that period of time for which the investor has an interest in the building’s life (Fuller & Peterson, 1996). The ISO define this as the ‘period of analysis’, which they state is the length of time over which the LCC is calculated (BS-ISO, 2008). According to Fuller & Petersen (1996), there is no optimum length of study and should be selected in light of the clients specific requirements or investment time horizon. In a WLCC analysis this may be the estimated physical life of the building or alternatively the estimated period of use (BS-ISO, 2008). Clift (2003) and Swaffield & McDonald (2008) comment that in PFIs, the study period is determined by the hand over date which is usually twenty to thirty years. The study period may also be determined by the investor’s expected payback period on their initial investment (Fuller & Peterson, 1996). Churcher (2008) maintains that for new construction or refurbishment projects, study periods of between fifteen and twenty- five years are used. However, on public projects periods of up to one hundred years are evident, which relates more closely to the number of years the client maintains an interest in the asset (RICS, 1999). As LCC is an analysis tool usually used for comparing project options and component options, the same study period should be applied to all options being evaluated (Churcher, 2008; Fuller & Peterson, 1996).

Various definitions exist to define the length of time during which the building satisfies specific requirements. These can be described as:

 economic life – a period of occupation which is considered to be the least cost option to satisfy a required functional objective

 functional life – the period until a building ceases to function for the same purpose as that for which it was built

 legal life – the life of a building, or an element of a building until the time when it no longer satisfies legal or statutory requirements

 physical life – life of a building or an element of a building to the time when physical collapse is possible

 social life – life of a building until the time when human desire dictates replacement for reasons other than economic consideration

 technological life – life of a building or an element until it is no longer technically superior to alternatives.

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