Step 2: Calculate average annual cost

ERDC TN-DOER-C27

July 2002

alternative. Alternatives with positive net benefits (a.k.a. BCR 1) are economically efficient

alternatives. The alternative with the greatest net benefits maximizes benefits.

Step 2: Calculate average annual cost. Although specifics will vary between sites and the

alternatives being evaluated, the economic analysis essentially follows the same series of steps.

These are described in the following paragraphs. The analysis can be readily incorporated into a

spreadsheet, facilitating comparison of several alternatives. This has been done for two examples,

which are included as Appendix C.

Project Assumptions. This might include type of work, available disposal capacity, and base

condition, for example:

a. Type of dredging: new channel construction followed by maintenance dredging over

the period of analysis.

b. Disposal alternatives: no existing CDF.

c. Base condition: CDF disposal, without separation or mechanical dewatering (no material

will go offsite).

II.

Calculate Base Condition

a. Develop initial construction/dredging costs. These will be engineering costs, including

all items that will impact the total project costs. Such items include mobilization/

demobilization, dredging, dewatering, transportation, and placement. Any associated

costs, such as CDF construction or expansion required to accommodate the initial (new-

work construction) dredged material, must also be included in the construction costs.

(Existing capacity is treated as a sunk cost, and is not factored into the evaluation.)

Establish a construction period, annual quantity dredged, and total annual construction

cost.

b. Calculate interest during construction (IDC). IDC is the value adjustment of pre-base

year construction costs, and is an economic cost that will not actually be paid by any party

involved with the project. (In economic analyses, the base year refers to the first full year

the project is operational.) IDC should be applied to all construction costs, including all

costs associated with channel dredging as well as any placement costs, such as CDF

construction or expansion. (Sunk construction costs for an existing CDF are not

considered pre-base construction costs. Costs for a CDF constructed specifically for the

project defined for the period of analysis are considered pre-base construction costs.) The

calculation is done to bring all construction costs to the base year and make them

equivalent in their time value. IDC should be calculated using the formula:

IDC = P * (1 + i)t - P

(1)

where

P = Annual construction amount

i = Federal discount rate

t = Time (years from construction year to base year)