CTC 475 Review  BTCF to ATCF

CTC 475 Estimating and Inflation

Objectives  Know a few ways to estimate prices  Know how to account for inflation  Know the difference between actual and real dollars

Estimating Cash Flows Should be an organized approach  Work breakdown structure (tasks, subtasks)  Cost and Revenue (life-cycle)

Estimating Models  Indices (index by year, area, etc.)  Unit (sq ft, LF of retaining wall, etc)  Factor (sum of units; detailed breakdown)

Index Example  Index for New York City is 1.26  Construction costs are 26% higher than upstate NY

Unit Technique  House approximately 2000 sq ft  Price approximately $55/sq ft  Estimated Price=$110,000

Factor Technique-More detailed  2x4  Faucets  Lights  Plywood  Shingles  Etc.

Other ideas  Bottom-up estimating  Top down estimating (design to cost)  Value Engineering-get input in design process for better design at lower cost

Inflation  Prices change over time  Inflation-an increase in the average price paid for goods and services  Can affect economic comparison of alternatives

Deflation  Deflation—prices decrease over time  Inflation is much more common than deflation

Measures of Inflation  CPI (consumer price index) Avg annual rate from ’82 to ’94 –3.33% Avg annual rate from ’94 to ’04 – 2.45%  PPI (producer price index)  Source: Bureau of Labor Statistics; US Dept. of Labor

Actual Dollars (A$) 1. The # of dollars associated w/ a cash flow as of the time it occurs 2. Other names: Nominal Current Then-current Inflated $

Real Dollars (R$) 1. Dollars expressed in terms of the same purchasing power relative to a particular time 2. Also called constant dollars

Example (A$ and R$)  Investor wishes to retire in the year 2030 (25 years) with savings of $1,000,000 (2005 spending power) Assuming the inflation rate is 3.75% what are the actual and real dollar values for 2005 and 2030?  1E6(1.0375)^25 A$R$ 2005$1,000K 2030$2,510K$1,000K

Interest Rates  Real interest rate (i r ) Rate paid for use of capital Doesn’t include inflation Also called inflation-free interest rate  Inflation rate (f)  Combined (market) interest rate (i c )  Relationship between (f, i r, i c ) i c =i r +f+i r *f

Relationship between (f, i r, i c ) i c =i r +f+i r *f Example of combined rate (I-bonds) onds/res_ibonds_iratesandterms.htm

Salary Purchasing Power Example Example 8-1 from your book (pg 355 or 359)  Salary data for 4 years (based on a 4% salary raise) is as follows:  $45,000  $46,800  $48,672  $50,619

Salary Purchasing Power Example Example 8-1 (continued)  Real $ salary data (base year is 1 st year) for 4 years (based on a 6% inflation rate) is as follows:  $45,000  $46,800 (P/F6,1)=$44,151  $48,672 (P/F6,2)=$43,318  $50,619 (P/F6,3)=$42,500

Salary Increase Lesson?

Rules for Economic Analysis 2 Methods  Express all cash flows in Actual $ and use the combined interest rate (ic)----accounts for inflation and use of capital OR  Express all cash flows in terms of Real $ and use the real interest rate (ir)---doesn’t include inflation

Using Actual Dollars  Actual dollars change for some items (salaries, materials)  Actual dollars don’t change for items fixed by contract (interest charges, lease fees, depreciation)

Next lecture  Sensitivity Analyses  Optimistic-Pessimistic  Probabilistic