CCEA Prep > Module 13 - Economic Analysis > Flashcards

Module 13 - Economic Analysis Flashcards

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1
Q

What is the purpose of Economic Analysis (EA)?

A
  • Maximize program or organizational objectives
  • Facilitate selection of the best investment option
  • Compare costs and benefits of alternatives

EA is designed to aid decision-making regarding the allocation of scarce resources.

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2
Q

What are the key ideas in Economic Analysis?

A
  • Competing investment alternatives
  • Time value of money
  • Corresponding nature of costs and benefits

These concepts are essential for comparing and evaluating investment options.

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3
Q

What is the primary analytical construct used in EA?

A

Discounting

Discounting applies a factor to future-value costs and benefits to convert them into equivalent present values.

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4
Q

True or false: Economic Analysis is sometimes referred to as a Cost Benefits Analysis (CBA).

A

TRUE

Some organizations distinguish between EA and CBA, while others view them as the same.

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5
Q

What organizations often require EAs?

A
  • Department of Defense (DoD)
  • Federal Aviation Administration (FAA)

EAs are crucial for milestone decision reviews and acquisition life cycle processes.

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6
Q

What are the seven major steps in the Economic Analysis process?

A
  • Define the objective
  • Formulate assumptions and ground rules
  • Identify and examine alternatives
  • Develop cost and benefits estimates
  • Compare and rank alternatives
  • Test sensitivity of rankings
  • Formulate the recommendation

These steps guide the EA process to ensure thorough analysis.

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7
Q

What is the first step in the Economic Analysis process?

A

Define the objective

A well-defined objective is crucial for a successful EA.

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8
Q

What are the two categories of assumptions in EA?

A
  • Mathematical or methodological assumptions
  • Bounding assumptions

Assumptions are critical for limiting the analysis and should be documented and reevaluated.

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9
Q

What is the minimum number of alternatives required in an EA?

A

At least two alternatives

This includes the status quo and one alternative solution.

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10
Q

What are the common types of alternatives in EA?

A
  • Status quo or status quo plus
  • Modernize existing assets
  • Lease/Privatization
  • New Acquisition

These categories help in evaluating different approaches to solving a problem.

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11
Q

What is the most analytical and time-consuming part of the EA process?

A

Develop the cost and benefits estimates

This step involves extensive data gathering and analysis.

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12
Q

What is the economic life cycle of an alternative?

A

The period during which an alternative provides benefits

It is constrained by the system’s physical, mission, and technological life.

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13
Q

What is the period of analysis in EA?

A

The economic life plus any lead time required for implementation

This period determines how long benefits will be evaluated.

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14
Q

What is the Base Year (BY) in EA?

A

The first year in which there is a difference in expenditures among alternatives

The BY is critical for adjusting estimates for inflation.

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15
Q

What is the role of sensitivity analysis in EA?

A

Handles estimating uncertainty by testing discrete cases

It evaluates risk and uncertainty in the analysis.

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16
Q

Fill in the blank: The primary benefit of conducting an EA is __________.

A

Decision-making support

EAs provide objective documentation for chosen alternatives.

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17
Q

What is the purpose of a cost estimate in the EA process?

A

To capture all anticipated expenses for each alternative

A comprehensive cost estimate is essential for evaluating different alternatives in the EA process.

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18
Q

What framework is useful for developing a cost estimate?

A

Work Breakdown Structure (WBS) or Cost Element Structure (CES)

These frameworks help ensure all applicable costs are captured.

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19
Q

List the types of costs to include in an EA cost estimate.

A
  • Development
  • Acquisition
  • Operations
  • Support
  • Maintenance
  • Disposal
  • Opportunity costs
  • Imputed costs

These costs provide a comprehensive view of the financial implications of each alternative.

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20
Q

What are sunk costs?

A

Costs that have already been realized

Sunk costs should not be included in the cost estimate but should be documented.

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21
Q

What are wash costs?

A

Costs realized by all alternatives equally

These costs can be included or excluded based on the requirement for total program funding.

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22
Q

What is a benefits estimate?

A

An assessment of the advantages gained by implementing the program under analysis

This estimate is often challenging to quantify and express in monetary terms.

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23
Q

List the three categories of benefits.

A
  • Quantifiable and monetary
  • Quantifiable and non-monetary
  • Non-quantifiable but qualitative

Categorizing benefits helps in the analysis and comparison of alternatives.

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24
Q

What is cost savings?

A

A reduced future budget requirement

This is a type of monetary benefit that should be included in the benefits estimate.

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25
Define **residual value**.
The value of an asset at any time before the end of its economic life ## Footnote This value is important for alternatives with different economic lives.
26
What is the difference between **terminal value** and **salvage value**?
Terminal value is at the end of economic life; salvage value is at the end of physical life ## Footnote Both values are important for understanding the worth of assets over time.
27
What is the importance of **phasing** in cost and benefits estimates?
It allows for discounting and comparison reasons ## Footnote Phasing helps align the timing of costs and benefits with the implementation of alternatives.
28
What does **discounting** account for?
The time value of money ## Footnote This process adjusts costs and benefits to present value terms for accurate comparison.
29
True or false: **Discounting** is the same as inflation.
FALSE ## Footnote Discounting adjusts for timing differences, while inflation reflects changing price levels over time.
30
What is the purpose of **discount rates**?
To economically adjust estimates for present value comparison ## Footnote Discount rates are based on the government's cost of borrowing money.
31
What is the relationship between **discounting** and **opportunity cost**?
Discounting reflects the lost opportunity of investing resources elsewhere ## Footnote This principle is crucial for understanding the economic implications of project funding.
32
What are the **maturities** for treasury notes that affect borrowing rates?
* 3 years * 5 years * 7 years * 10 years * 20 years * 30 years ## Footnote Rates can be linearly extrapolated for periods of analysis between these maturities.
33
The formula for calculating **PV** of a cost or benefit is _______.
PV=FV[1/(1+i)^{n}] ## Footnote Where FV is the future value, i is the interest rate, and n is the number of periods.
34
What are the two types of **discount rates** published?
* Real discount rates * Nominal discount rates ## Footnote Real rates are used with constant year dollars, while nominal rates include an inflationary adjustment.
35
True or false: **End of year factors** assume all costs/benefits accrue at the beginning of the year.
FALSE ## Footnote End of year factors assume accrual at the end of the year, while mid-year factors assume accrual throughout the year.
36
What is the primary **comparison technique** used in economic analysis according to OMB Circular A-94?
NPV analysis ## Footnote NPV analysis involves discounting all costs and benefits to present value and ranking alternatives.
37
The calculation for **NPV** is expressed as _______.
NPV = PV(Benefits) - PV(Costs) ## Footnote NPV is the difference between the present value of benefits and costs.
38
What does a **positive NPV** indicate about a government program?
It increases social resources and is generally preferred ## Footnote Programs with negative NPV should generally be avoided.
39
What are the two types of **discount factors** used?
* End of year factors * Mid-year factors ## Footnote Mid-year factors include a correction in the exponent.
40
What does **SIR** stand for in economic analysis?
Savings/Investment Ratio ## Footnote SIR indicates the economic performance of an investment, requiring a result greater than one.
41
The **Internal Rate of Return (IRR)** is defined as the discount rate that makes the NPV equal _______.
zero ## Footnote IRR is used to evaluate the efficiency of an investment.
42
What is the **Payback Period** in economic analysis?
The point in time when discounted cash flows net out to zero ## Footnote It indicates when an investment pays for itself.
43
What is the purpose of **sensitivity analysis** in economic analysis?
To test assumptions and determine their influence on the analysis outcome ## Footnote It highlights strengths and weaknesses in recommendations.
44
According to DODI 7041.3, the economic analysis report should begin with a summary of the analysis and an interpretation of the _______.
results ## Footnote This includes a recommendation of the preferred alternative.
45
The **Savings/Investment Ratio (SIR)** is calculated as _______.
SIR = PV(Savings) / PV(Investment) ## Footnote A higher SIR indicates better economic performance.
46
What is the **Uniform Annual Cost (UAC)** method?
Discounting all costs to net present value and dividing by the sum of discount factors ## Footnote UAC is also known as equivalent annual cost.
47
What does the **Cost/Benefit Ratio (C/BR)** show?
Costs to benefits as a simple ratio ## Footnote It is calculated by dividing PV(Costs) by PV(Benefits).
48
What is the **first step** in the Economic Analysis (EA) process?
Example Objective ## Footnote The first step involves identifying the problem and determining the root cause that needs to be addressed.
49
In the example, what is the **problem** related to lawn maintenance?
It currently takes too long to mow the lawn ## Footnote Other commitments have reduced the time available for mowing on Saturday afternoons.
50
List the **candidate objectives** identified for lawn maintenance.
* Minimize the time required to mow the lawn * Maximize the efficiency of mowing the lawn * Identify an optimal lawn maintenance program * Improve the quality of life * Attempt to get someone else to mow the lawn ## Footnote These objectives help in determining the best approach to tackle the problem.
51
Which candidate objective is selected for the analysis?
Identify the optimal lawn maintenance program ## Footnote This objective is broader and aims to ensure improvements benefit the mower.
52
What are the **assumptions** made regarding lawn maintenance?
* Focus on mowing the lawn only * Mow the lawn 10 times per year * Not mowing the lawn and moving are not feasible options ## Footnote Assumptions are revisited throughout the EA process.
53
What are the **alternatives** considered for lawn maintenance?
* Status quo: Do nothing * Upgrade existing lawnmower * Purchase a new lawnmower * Outsource the effort * Stop mowing the lawn * Move to a house with a smaller lawn ## Footnote The last two alternatives are confirmed to be infeasible.
54
What is the **economic life** of the status quo alternative?
2 years ## Footnote The lawnmower is not expected to physically last longer than this period.
55
What is the **period of analysis** for the EA?
10 years ## Footnote This period spans from FY08 through FY17.
56
What is the **purchase price** for a new lawnmower?
$2000 ## Footnote This cost is part of the economic analysis for the purchase alternative.
57
What are the **estimated costs** for the upgrade of the existing lawnmower?
* New deck / blades: $300 * Engine overhaul: $250 ## Footnote These costs include both materials and labor for the upgrade.
58
What are the **candidate benefits** identified for lawn maintenance?
* Time savings * Ecological benefits * Residual value * Salvage value * Cost avoidance benefits ## Footnote These benefits help in evaluating the alternatives.
59
What is the **time savings** realized with the new lawnmower?
1 hour ## Footnote The new lawnmower significantly reduces mowing time compared to the current method.
60
What is the **salvage value** for the upgraded lawnmower?
$75 ## Footnote This value is realized at the end of the economic life of the upgraded lawnmower.
61
True or false: The **status quo** alternative is expected to have time savings.
FALSE ## Footnote The status quo does not provide any time savings compared to other alternatives.
62
What is the **annual maintenance cost** for any mower?
* Maintenance: $25/yr * Labor: $75/yr ## Footnote These costs are recurring and need to be considered in the analysis.
63
What is the **economic life** of the new lawnmower?
10 years ## Footnote The new lawnmower is expected to last this long, impacting the analysis period.
64
What is the **economic life** of the current lawnmower?
FY09 (year #2) ## Footnote This marks the end of the economic life for the current lawnmower.
65
What is the **economic life** of the upgraded lawnmower?
FY12 (year #5) ## Footnote This indicates when the upgraded lawnmower will no longer be economically viable.
66
What is the **economic life** of the new lawnmower?
FY17 (year #10) ## Footnote This is the estimated end of the economic life for the new lawnmower.
67
What is the **total cost** for the status quo mowing system?
$600/yr ## Footnote This is calculated based on 3 hours/mow, 10 mows/yr at $20/hr.
68
What is the **total savings** realized by using the upgraded lawnmower?
$200 ## Footnote This is the difference in time value compared to the status quo.
69
What is the **total savings** realized by using the new lawnmower?
$400 ## Footnote This reflects the time savings compared to the status quo.
70
What is the **total savings** realized by outsourcing the mowing effort?
$600 ## Footnote This indicates no time spent mowing the lawn.
71
What is the **discount rate** used for the analysis?
2.8% ## Footnote This real rate is applied since the analysis is in constant year dollars.
72
What is the **formula** for calculating Present Value (PV) Cost?
PV Cost = Annual Cost * Annual Discount Factor ## Footnote This formula is used to determine the present value of costs over time.
73
What is the **formula** for calculating Present Value (PV) Benefit?
PV Benefit = Annual Benefit * Annual Discount Factor ## Footnote This formula helps to assess the present value of benefits over time.
74
What is the **Net Present Value (NPV)** for the outsourcing effort?
128 ## Footnote This indicates the net benefit of outsourcing the mowing effort.
75
What is the **NPV** for purchasing a new lawnmower?
103 ## Footnote This shows the net benefit of the new lawnmower option.
76
What is the **NPV** for upgrading the lawnmower?
-31 ## Footnote This indicates a net loss for the upgraded lawnmower option.
77
What is the **NPV** for the status quo?
-125 ## Footnote This reflects a net cost associated with maintaining the current system.
78
What is the **depreciation** formula?
Depreciation = (Cost - Residual value) / Useful life ## Footnote This formula calculates the annual depreciation of an asset.
79
What is the **cumulative depreciation** formula?
Cumulative Depreciation = Initial Value - Current Value ## Footnote This calculates the total depreciation accumulated over time.
80
What are some **methods of depreciation**?
* Straight-line * Sinking fund * Declining balance * Modified Accelerated Cost Recovery System (MACRS) ## Footnote These methods vary in how they calculate depreciation over an asset's life.
81
What is the **time value** of the mower's time in the analysis?
$20/hr ## Footnote This value is used to calculate the cost of mowing time.
82
What is the **time taken** to mow with the current lawnmower?
3 hours/mow ## Footnote This is the time required to mow the lawn using the current lawnmower.
83
What is the **time taken** to mow with the upgraded lawnmower?
2 hours/mow ## Footnote This reflects the reduced mowing time with the upgraded lawnmower.
84
What is the **time taken** to mow with the new lawnmower?
1 hour/mow ## Footnote This indicates the efficiency of the new lawnmower.
85
What is the **assumption** regarding ecological benefits in the analysis?
Non-quantifiable ## Footnote Ecological benefits are not included in the cost estimates.
86
What is the **sum of the years' digits** method used for?
An accelerated depreciation method ## Footnote It expresses depreciation as a fraction with the sum of digits from 1 to the number of years as the denominator.
87
What are the **four main depreciation methods** mentioned?
* Sum of the years' digits * Historical method * Units of production * Units of time ## Footnote These methods vary in how they allocate depreciation over time.
88
In the **straight-line depreciation** method, how is the annual depreciation calculated?
Depreciation = (Cost - Salvage value) / Useful life ## Footnote This method produces equal annual depreciation for every year.
89
What is the **depreciation expense** formula for the sum of the years' digits method?
Depreciation expense = (Cost - Salvage value) * Fraction ## Footnote The fraction is based on the sum of the years' digits.
90
What is the **sinking fund method** of depreciation?
Allocates more depreciation to later years ## Footnote The first year's depreciation equals the annual deposit needed for a sinking fund.
91
What is the **fixed percentage method** in depreciation?
Annual depreciation is a fixed percentage of the book value at the beginning of the year ## Footnote Choosing an adequate rate is crucial to avoid discrepancies with salvage value.
92
What is the **declining balance method**?
A combination of straight line and fixed percentage methods ## Footnote It uses a declining balance factor to calculate depreciation.
93
What is the **double declining balance method**?
Depreciation rate = Straight line rate * 200% ## Footnote This method accelerates depreciation in the early years.
94
Calculate the **depreciation for 2006** if Company A purchased equipment for $140,000 with a salvage value of $20,000 and a useful life of 5 years.
$18,000 ## Footnote Depreciation for 2006 = ($140,000 - $20,000) * 1/5 * 9/12.
95
Calculate the **depreciation for 2007** for the same equipment.
$24,000 ## Footnote Depreciation for 2007 = ($140,000 - $20,000) * 1/5 * 12/12.
96
Calculate the **depreciation for 2008** for the same equipment.
$24,000 ## Footnote Depreciation for 2008 = ($140,000 - $20,000) * 1/5 * 12/12.
97
What is the **sum of the years' digits** for an asset with a useful life of 5 years?
15 ## Footnote Calculated as 5 + 4 + 3 + 2 + 1.
98
What is the **depreciation for 2000** if an asset is purchased for $100,000 with a salvage value of $10,000 and a useful life of 5 years?
$30,000 ## Footnote Depreciation for 2000 = ($100,000 - $10,000) * 5/15.
99
What is the **depreciation for 2001** for the same asset?
$24,000 ## Footnote Depreciation for 2001 = ($100,000 - $10,000) * 4/15.
100
What is the **depreciation for 2002** for the same asset?
$18,000 ## Footnote Depreciation for 2002 = ($100,000 - $10,000) * 3/15.
101
What is the **depreciation for 2003** for the same asset?
$12,000 ## Footnote Depreciation for 2003 = ($100,000 - $10,000) * 2/15.
102
What is the **depreciation for 2004** for the same asset?
$6,000 ## Footnote Depreciation for 2004 = ($100,000 - $10,000) * 1/15.
103
What is the goal of **Economic Adjustment (EA)** in management?
Maximize the use of scarce resources ## Footnote EA supports decision-making by providing objective comparisons of alternatives.
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