Abstract:
Past analyses of design solutions for building projects have concentrated on
initial capital costs, often to the extent where the effects of subsequent
operating costs are completely ignored. However, even in cases where a
wider view of cost has been adopted, the discounting process has commonly
disadvantaged future expenditure so heavily as to make performance after the short term irrelevant to the outcome, resulting in projects which display low capital and high operating costs to be given favour. Thus design
solutions that aim to avoid repetitive maintenance, reduce waste, save nonrenewable
energy resources or protect the environment through selection of
better quality materials and systems, usually having a higher capital cost, are
often rejected on the basis of the discounting process. Furthermore, the
formulation of the discount rate has normally lacked rigour and has often
resulted in an assumed rate that has implied profit and risk and has ignored
taxation.
Discounted present value is a measure of equivalence for time-phased costs
and benefits derived from consideration of the theoretical investment return,
preferably after tax. As it takes account of the cost of money, discounting can
be described as leading to the determination of equivalent value using an
investment-based or capital productivity approach. It is hypothesized and
verified that the value of future costs and benefits is additionally susceptible
to fluctuations in their base worth over time as reflected by changes in
incremental escalation and the affordability of goods and services between
present and future generations. Making adjustments for changes in worth
may thus be described as contributing to the determination of equivalent
value using a prosperity-based or time preference approach.
The analysis of Australian sectorial income and expenditure data over a forty-year
period shows that affordability changes can be measured and
represented as an index. The discount rate is identified as a combination of
the real weighted cost of capital, differential price level changes and
diminishing marginal utility, where the latter is depicted by changes in the
affordability of goods and services. This results in a composite discount rate
that encompasses project-related, product-related and investor-related
attributes. Tangible (financial) costs and benefits are discounted by this rate
while intangible (environmental and social) costs and benefits are left as real
value. Recommendations concerning the determination of equivalent value
should ensure that the future operating performance of projects is more
equitably assessed and that sustainable development remains an achievable
objective in life-cost studies.
