SOME PROBLEMS IN COST ANALYSIS
INSTITUTE FOR DEFENSE ANALYSES ALEXANDRIA VA RESEARCH AND ENGINEERING SUPPORT DIV
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THE PURPOSE OF COST-EFFECTIVENESS STUDIES IS TO MAKE COMPARISONS OF VARIOUS ALTERNATIVE FUTURE RESOURCE COMMITMENTS. The implementation of each system being considered would result in a future stream of effectiveness however it is measured and a future stream of costs. Often the stream of cost and the stream of effectiveness associated with one system have time-phased profiles different from those of another system. It is virtually impossible to make a direct comparison of such systems. There is generally no way to evaluate the worth of future effectiveness as opposed to the worth of present effectiveness. Discounting, however, can be used to make a logical if indirect comparison of the cost streams. Thus, discounting is a tool for determining the present value of cost streams. Discounting should not be used to attempt to account for future uncertainties with regard to weapon system performance. If the future effectiveness of one system is in doubt because of uncertainty about the future effectiveness of the system, it should be done directly as part of the effectiveness calculation and not by using a high discount rate.
- Economics and Cost Analysis
- Administration and Management