# ASTM E1074-15

Designation: E1074 − 15Standard Practice forMeasuring Net Benefits and Net Savings for Investments inBuildings and Building Systems1This standard is issued under the fixed designation E1074; the number immediately following the designation indicates the year oforiginal adoption or, in the case of revision, the year of last revision. A number in parentheses indicates the year of last reapproval. Asuperscript epsilon (´) indicates an editorial change since the last revision or reapproval.INTRODUCTIONThe net benefits (NB) and net savings (NS) methods are part of a family of economic evaluationmethods that provide measures of economic performance of an investment over some period of time.Included in this family of evaluation methods are life-cycle cost analysis, benefit-to-cost andsavings-to-investment ratios, internal rates of return, and payback analysis.The NB method calculates the difference between discounted benefits and discounted costs as ameasure of the cost effectiveness of a project. The NS method calculates the difference betweenlife-cycle costs as a measure of the cost-effectiveness of a project. The NB and NS methods aresometimes called the net present value method. The NB and NS methods are used to decide if a projectis cost effective (net benefits greater than zero, or net savings greater than zero), or which size, ordesign, competing for a given purpose is most cost effective (the one with the greatest net benefits, orthe one with the greatest net savings).1. Scope1.1 This practice covers a recommended procedure forcalculating and interpreting the net benefits (NB) and netsavings (NS) methods in the evaluation of building designs andsystems.1.2 The values stated in inch-pound units are to be regardedas standard. The values given in parentheses are mathematicalconversions to SI units that are provided for information onlyand are not considered standard.1.3 This standard does not purport to address all of thesafety concerns, if any, associated with its use. It is theresponsibility of the user of this standard to establish appro-priate safety and health practices and determine the applica-bility of regulatory limitations prior to use.2. Referenced Documents2.1 ASTM Standards:2E631 Terminology of Building ConstructionsE833 Terminology of Building EconomicsE917 Practice for Measuring Life-Cycle Costs of Buildingsand Building SystemsE964 Practice for Measuring Benefit-to-Cost and Savings-to-Investment Ratios for Buildings and Building SystemsE1057 Practice for Measuring Internal Rate of Return andAdjusted Internal Rate of Return for Investments inBuildings and Building SystemsE1121 Practice for Measuring Payback for Investments inBuildings and Building SystemsE1185 Guide for Selecting Economic Methods for Evaluat-ing Investments in Buildings and Building SystemsE1369 Guide for Selecting Techniques for Treating Uncer-tainty and Risk in the Economic Evaluation of Buildingsand Building SystemsE1765 Practice for Applying Analytical Hierarchy Process(AHP) to Multiattribute Decision Analysis of InvestmentsRelated to Buildings and Building SystemsE1946 Practice for Measuring Cost Risk of Buildings andBuilding Systems and Other Constructed ProjectsE2204 Guide for Summarizing the Economic Impacts ofBuilding-Related Projects2.2 Adjuncts:3Discount Factor Tables Adjunct to Practices E917, E964,E1057, E1074, and E11211This practice is under the jurisdiction of ASTM Committee E06 on Perfor-mance of Buildings and is the direct responsibility of Subcommittee E06.81 onBuilding Economics.Current edition approved May 1, 2015. Published June 2015. Originallyapproved in 1985. Last previous edition approved in 2009 as E1074 – 09. DOI:10.1520/E1074-15.2For referenced ASTM standards, visit the ASTM website, www.astm.org, orcontact ASTM Customer Service at service@astm.org. For Annual Book of ASTMStandards volume information, refer to the standard’s Document Summary page onthe ASTM website.3Available from ASTM International Headquarters. Order Adjunct No.ADJE091703.Copyright © ASTM International, 100 Barr Harbor Drive, PO Box C700, West Conshohocken, PA 19428-2959. United States13. Terminology3.1 Definitions—For definitions of general terms related tobuilding construction used in this practice, refer to Terminol-ogy E631; and for general terms related to building economics,refer to Terminology E833.4. Summary of Practice4.1 This practice is organized as follows:4.1.1 Section 2, Referenced Documents—Lists ASTM stan-dards referenced in this practice.4.1.2 Section 3, Definitions—Addresses definitions of termsused in this practice.4.1.3 Section 4, Summary of Practice—Outlines the con-tents of the practice.4.1.4 Section 5, Significance and Use—Explains the appli-cation of the practice and how and when it should be used.4.1.5 Section 6, Procedures—Summarizes the steps in mak-ing NB (NS) analysis.4.1.6 Section 7, Compute NB (NS)—Describes calculationprocedures for NB (NS).4.1.7 Section 8, Anaylsis of NB (NS) Results and theDecision—Discusses the decision criterion and the treatment ofuncertainty, risk, and unqualified effects.4.1.8 Section 9, Applications—Explains circumstances un-der which the NB (NS) method is appropriate.4.1.9 Section 10, Report—Identifies information that shouldbe included in a report of a NB (NS) analysis.5. Significance and Use5.1 The NB (NS) method provides a measure of the eco-nomic performance of an investment, taking into account allrelevant monetary values associated with that investment overthe investor’s study period. The NB (NS) measure can beexpressed in either present value or equivalent annual valueterms, taking into account the time value of money.5.2 The NB (NS) method is used to decide if a given projectis cost effective and which size or design for a given purposeis most cost effective when no budget constraint exists.5.3 The NB (NS) method can also be used to determine themost cost effective combination of projects for a limitedbudget; that is, the combination of projects having the greatestaggregate NB (NS) and fitting within the budget constraint.5.4 Use the NB method when the focus is on the benefitsrather than project costs.5.5 Use the NS method when the focus in on project savings(that is, reductions in project costs).6. Procedures6.1 The recommended steps for applying the NB (NS)method to an investment decision are summarized as follows:6.1.1 Make sure that the NB (NS) method is the appropriateeconomic measure (see Guide E1185),6.1.2 Identify objectives, alternatives, and constraints,6.1.3 Establish assumptions,6.1.4 Compile data,6.1.5 Convert cash flows to a common time basis(discounting),6.1.6 Compute NB (NS)4and compare alternatives, and6.1.7 Make final decision, based on NB (NS) results as wellas consideration of risk and uncertainty, unquantifiable effects,and funding constraints (if any).6.2 Since the steps mentioned in 6.1.2 – 6.1.5 are treated indetail in Practice E917 and briefly in Practices E964 andE1121, they are not discussed in this practice. In calculatingNB (NS), these four steps should be followed exactly asdescribed in Practice E917. The remainder of this practicefocuses on the computation, analysis, and application of theNB (NS) measure. A comprehensive example of the NBmethod applied to a building economics problem is provided inAppendix X1. A comprehensive example of the NS methodapplied to a building economics problem is provided inAppendix X2.7. NB (NS) Computation7.1 Computation of NB for any given project requires theestimation, in dollar terms, of differences between benefits, anddifferences between costs, for that project relative to a mutuallyexclusive alternative. Computation of NS for any given projectrequires the estimation, in dollar terms, of the differencebetween life-cycle costs for the project relative to a mutuallyexclusive alternative. The mutually exclusive alternative maybe a similar design/system of a different scale, a dissimilardesign/system for the same purpose, or the do nothing case.Denote the alternative under consideration as Ajand themutually exclusive alternative to be used for purposes ofcomparison as Ak. Alternative Akis typically the do nothingcase or the project with the lowest first cost, which may or maynot be the same project. But the analyst can choose any of themutually exclusive alternatives as the base case against whichto compare alternatives. Benefits can include (but are notlimited to) revenue, productivity, functionality, durability, re-sale value, and tax advantages. Costs can include (but are notlimited to) initial investment, operation and maintenance (in-cluding energy consumption), repair and replacements, and taxliabilities.7.2 Eq 1 is used to compute the present value of net benefits(PVNBj:k) for the proposed project relative to its mutuallyexclusive alternative.PVNBj:k5(t50N~Bt2 C¯t!/~11i!t(1)where:Bt= dollar value of benefits in period t for the building orsystem being evaluated, Aj, less the counterpart benefitsin period t for the mutually exclusive alternative againstwhich it is being compared, Ak,C¯t= dollar costs, including investment costs, in period t forthe building or system being evaluated, Aj, less thecounterpart costs in period t for the mutually exclusivealternative against which it is being compared, Ak,4The NIST Building Life-Cycle Cost (BLCC) Computer Program helps userscalculate measures of worth for buildings and building components that areconsistent with ASTM standards. The program is downloadable from http://www.eere.energy.gov/femp/information/download_blcc.html.E1074 − 152N = number of discounting time periods in the study period,andi = the discount rate per time period.7.3 Use Eq 2 to convert the present value of net benefits toannual value terms, where N is the number of years in the studyperiod and i is the discount rate.AVNBj:k5 PVNBj:k·@~i~11i!N!/~~11i!N2 1!# (2)where AVNBj:k= annual value of net benefits.7.4 Use Eq 3 to compute the present value of net savings(PVNSj:k) for the proposed project, Aj, relative to its mutuallyexclusive alternative, Ak. The terms appearing in Eq 3 arebased on the life-cycle cost (LCC) method, Practice E917.Subtract from project costs in the year in which they occur anypure benefits (for example, increased rental income due toimprovements) in the LCC calculation.PVNSj:k5 LCCk2 LCCj(3)where:LCCj= the life-cycle costs of the alternative underconsideration, Aj, andLCCk= the life-cycle costs of the mutually exclusivealternative, Ak.7.5 Use Eq 4 to convert the present value of net savings toannual value terms, where N is the number of years in the studyperiod and i is the discount rate.AVNSj:k5 PVNSj:k·@~i~11i!N!/~~11i!N2 1!# (4)where:AVNSj:k= annual value of net savings.7.6 For a given problem and data set, solutions in eitherpresent value or annual value terms will be time equivalentvalues (although different in actual dollar values) and willresult in the same investment or design decisions, providedannual values are calculated using Eq 2 for net benefits and Eq4 for net savings.7.7 A simple application of Eq 1 is presented in Table 1 foran initial investment of $10 000 that yields an uneven yearlycash flow over four years. (Implicitly, the mutually exclusivealternative is the do nothing case.) Assuming a discount rate of15 %, the discounted cash flows yield a PVNB of $1823. (Notethat the sum of net cash flows, $7000, is a much larger value,since it fails to account for the eroding value of money overtime.) The larger the PVNB for a given project, the moreeconomically attractive it will be, other things being equal.7.8 To find the AVNB that is time equivalent to $1823, useEq 2. The equivalent AVNB is $639.8. Analysis of NB (NS) Results and the Decision8.1 Use the results of the NB (NS) computation to rankorder alternatives from highest to lowest NB (NS). Thealternative with the highest NB (NS) is the most cost effective.8.2 In the final investment decision, take into account notonly the numerical values of NB (NS), but also uncertainty ofinvestment alternatives relative to the risk attitudes of theinvestor, the availability of funding and other cash-flowconstraints, any unquantified effects attributable to thealternatives, and the possibility of noneconomic objectives.(These topics are discussed in Section 10 of Practice E917.)8.2.1 Decision makers typically experience uncertaintyabout the correct values to use in establishing basic assump-tions and in estimating future costs. Guide E1369 recommendstechniques for treating uncertainty in parameter values in aneconomic evaluation. It also recommends techniques for evalu-ating the risk that a project will have a less favorable economicoutcome than what is desired or expected. Practice E1946establishes a procedure for measuring cost risk for buildingsand building systems, using the Monte Carlo simulationtechnique as described in Guide E1369. Practice E917 providesdirection on how to apply Monte Carlo simulation whenperforming economic evaluations of alternatives designed tomitigate the effects of natural and man-made hazards that occurinfrequently but have significant consequences. Practice E917contains a comprehensive example on the application of MonteCarlo simulation in evaluating the merits of alternative riskmitigation strategies for a prototypical data center.8.2.2 Describe any significant effects that remain unquanti-fied. Explain how these effects impact the recommendedalternative. Refer to Practice E1765 for guidance on how topresent unquantified effects along with the computed values ofNB (NS) or any other measures of economic performance.9. Applications9.1 The NB (NS) measure indicates that a given project iscost effective if the PVNB (PVNS) is greater than zero. If thePVNB (PVNS) is less than zero, then the project is not costeffective.9.2 How large an investment to make (that is, what is themost economically efficient scale) is generally answered withNB (NS) analysis. The size or scale of investment is increasedTABLE 1 Calculation of Net BenefitsYear, t Benefits, Bt, dollars Costs, C¯t, dollarsNet Cash FlowBt−C¯t, dollarsSPV FactorAfor i=15%PVNB, dollars0 0 10 000 −10 000 1.000 −10 0001 4 000 3 000 +1 000 0.8696 +8702 11 500 4 500 +7 000 0.7561 +5 2933 10 000 4 000 +6 000 0.6575 +3 9454 8 000 5 000 +3 000 0.5718 +1 715Total 33 500 26 500 +7 000 +1 823ATo find the PVNB of the net cash flow for each discounting period, the single present value (SPV) discount factor is multiplied times the net cash flow. For an explanationof discounting factors and how to use them, see Discount Factor Tables.E1074 − 153until the PVNB (PVNS) is maximized. Typical size or scaleexamples from the building industry include (1) how large abuilding to construct, (2) how large a dam to construct, (3) howmuch insulation to put in a house, and (4) how many squarefeet of collector area to install in a solar energy system.9.3 Fig. 1 illustrates graphically how the NB method is usedto choose the economically efficient level of energy conser