Discounted Cash Flow Model for the Industrial Modernization Incentives Program.
LOGISTICS MANAGEMENT INST BETHESDA MD
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Determining the appropriate productivity savings reward under an Industrial Modernization Incentives Program agreement requires identification of the total potential reduction in contract price. The contract price must be determined for each of two situations, one with business as usual and one after the proposed productivity enhancement. Finding these two sets of expected contract prices requires consideration of changes in direct and indirect cost and changes in profit objectives in each year of the period under analysis. Discounted cash flow analysis is the appropriate tool for evaluating the financial attractiveness to the contractor of a proposed investment. Contractor-related cash flow includes payments based on depreciation, imputed cost of money, and profit, which is influenced by cost and by facilities capital employed. Contractor return on investment is usually evaluated in after-tax terms, which implies a need to consider the accelerated cost recovery system and investment tax credit provisions of the Internal Revenue Code. The cash flow model documented in this report provides evaluations of proposed savings share provisions. It identifies the benefit to DoD and to the U.S. Government including income tax effects. It measures the internal rate of return to the contractor. The parties are expected to evaluate several possible savings share arrangements in the process of developing an equitable contractural agreement.
- Economics and Cost Analysis