324 A. John Vogt
costs that occur over a capital asset’s useful life are called life-cycle costs.While it is difficult to estimate operating and maintenance costs to be incurred far into the future,such long-term,life-cycle costing can be useful in deciding on components and quality features to include in the design of the project and in evaluating a project’s overall benefit.For example,a choice may exist for a project between incurring higher initial capital costs and thereby lowering future operating costs, or reducing project quality and capital costs and thereby likely resulting in higher annual operating costs for the project.Lifecycle costing,which considers both future operating costs as well as the capital costs for a project,can provide a basis for comparing and choosing between such alternatives. The methods used in project evaluation range from informed judgment to sophisticated statistical or engineering-based analyses.Informed judgment can be reliable when a project is relatively small to modest in size,when cost estimates for it are well established,when decision makers have experience with that type of project,and when there are no viable alternatives to the project as requested.Evaluation methods that rely on quantitative analysis can be useful when capital projects are large,where cost estimates entail significant uncertainties,and of course where there are quantifiable or financial benefits. Financial analysis techniques are commonly used in business to evaluate proposed capital projects. These techniques can be used to help evaluate public sector projects that generate annual revenues or savings during the useful life of a project. One set of financial techniques that can be used to evaluate such projects relies on interest rate formulas that convert cash flows occurring over time to comparable values.Formulas are available for calculating the present value of future cash flows and comparing that value with a project’s original capital costs. There are other formulas for amortizing a capital cost incurred today to an equivalent annual value over a project’s useful life and for converting capital and future annual costs to a present value or to a single value at one time in the future. The use of these interest rate formulas requires the selection of an interest rate for discounting and an estimated useful life for a project.Even though assumptions about interest rates, project useful lives, and other factors create uncertainties about such financial analysis methods,more applications of the methods are occurring in evaluations ofcertain types ofpublic sector projects—for example,projects for public enterprises supported by user charges.