ctc 475 review btcf to atcf. ctc 475 estimating and inflation
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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 $1,000K
2030 $2,510K $1,000K
Interest Rates
Real interest rate (ir) Rate paid for use of capital Doesn’t include inflation Also called inflation-free interest rate
Inflation rate (f) Combined (market) interest rate (ic)
Relationship between (f, ir, ic) ic=ir+f+ir*f
Relationship between (f, ir, ic)
ic=ir+f+ir*f
Example of combined rate (I-bonds)http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm
Salary Purchasing Power ExampleExample 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 ExampleExample 8-1 (continued)
Real $ salary data (base year is 1st 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 Analysis2 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