UNITED STATES DEPARTMENT OF AGRICULTURE

Rural Utilities Service

**Bulletin 1724D-104**

**SUBJECT: [An Engineering Economics Computer Workbook
Procedure]{.underline}**

**TO:** RUS Electric Borrowers and RUS Electric Staff

**EFFECTIVE DATE:** Date of Approval

**OFFICE OF PRIMARY INTEREST:** Distribution Branch, Electric Staff
Division

**FILING INSTRUCTIONS:** This is a new bulletin. File hard copy along
with 7 CFR 1724. This bulletin can be accessed via the Internet on the
RUS website: http://www.usda.gov/rus

**PURPOSE:** This bulletin announces the availability of a Rural
Utilities Service engineering economics computer application. This
application offers users a planning tool for calculating the approximate
"total owning" costs of planned construction projects. The application
also compares annual costs of alternative construction projects. The
bulletin explains the worksheets, formulas and results of this computer
application.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
\_\_\_\_\_\_\_\_\_\_\_\_\_

Assistant Administrator Date

Electric Program

**TABLE OF CONTENTS**

[Page]{.underline}

1\. GENERAL DESCRIPTION

2\. USES FOR THE WORKBOOK ANALYSIS

3\. AVAILABILITY

4\. EXPLANATION OF WORKSHEET CALCULATIONS

5\. EXPLANATION OF RESULTS

6\. SENSITIVITY ANALYSIS

EXHIBIT 1: Worksheet "READ ME"

EXHIBIT 2: Worksheet "FCR"

EXHIBIT 3: Worksheet "INPUT"

EXHIBIT 4: Worksheet "PLAN 1" (First 9 of 30 years)

EXHIBIT 5: Worksheet "PLAN 2" (First 9 of 30 years)

EXHIBIT 6: Worksheet "COMPARE"

**ABBREVIATIONS**

FCR Fixed Charge Rate, (an economics term)

kW kilowatts (1,000 watts), (an amount of electrical power demand)

kWh kilowatt-hours (1,000 watt-hours), (an amount of electrical energy)

LdF Load Factor

LsF Loss Factor

MWh Megawatt-hours (1,000,000 watt-hours), (an amount of electrical
energy)

RUS Rural Utilities Service

# 1. GENERAL DESCRIPTION

This guide bulletin describes a computerized engineering economics
procedure developed by the Rural Utilities Service (RUS) which can be
used by RUS borrowers and others. This application was developed on
Microsoft Excel 5.0 for Windows.[^1] This guide bulletin details how the
RUS application can be used and explains the calculations made within
its worksheets. The bulletin does not derive the engineering economics
methodology used.

The application consists of a 645 kilobyte workbook file, named
"**ECONPLAN.XLS**" which contains the following 6 worksheets:

-   "READ ME" is a written page of instructions for entering data.

-   "FCR" is a form used to calculate the blended interest rate and the
    fixed charge rate factors from data found in RUS Form 7, "Financial
    and Statistical Report."

-   "INPUT" is a form used to calculate the annual load and loss
    factors. This form is also used to enter load losses, power costs,
    alternative fixed charge rate factors, inflation rates and present
    worth rates, all used in the engineering economics analysis.

-   "PLAN 1" is a form in which proposed construction descriptions,
    costs and expected changes in kW losses are entered by year. The
    costs of construction and losses are calculated and displayed.

-   "PLAN 2" is a form identical to "PLAN 1." "PLAN 2" is used to
    calculate and display the costs of an alternative construction plan
    with the same economic factors as used in "PLAN 1."

-   "COMPARE" is a worksheet which displays and compares, in tables and
    bar graphs, the accumulated costs of construction and losses of the
    alternative plans entered.

Examples of these worksheets with sample data are included in Appendix A
at the end of this bulletin.

**1.1 [The workbook]{.underline}** associated with this bulletin
determines the theoretical present cash required to finance a portion of
a construction program, per year, for a period of up to 30 years. The
workbook does the following:

-   Provides instructions and forms for entering data and information;

-   Inflates estimated construction costs to the year of installation,
    determines the present worth value of the inflated costs, and
    multiplies the results by the fixed charge rate;

-   Calculates future demand and energy losses and their future and
    present worth costs;

-   Totals and accumulates the above two sets of costs for each year for
    30 years;

-   Displays all of the input data and calculated results; and,

-   Displays selected accumulated totals in tables and on bar graphs.

**1.2 [This evaluation procedure]{.underline}** is widely used in the
electric utility industry. RUS finds this methodology of engineering
economic analysis acceptable for use by its borrowers in presenting
construction project evaluations. Other methods are also acceptable to
RUS.

**1.3 [Users should determine]{.underline}** if this computer
application is compatible for use on their own computer and printer.

# 2. USES FOR THE WORKBOOK ANALYSIS

This computer application was developed as a planning tool for
engineers, managers, and accountants. It can be used to:

-   Determine the approximate "total owning cost" of a planned
    construction project or a partial construction plan;

-   Compare construction requirements and the annual costs of two or
    more feasible plans that will each resolve an electric service
    problem. The most economically beneficial plan can be easily
    identified;

-   Document, for reference purposes, engineering and planning work that
    has been performed; and,

-   Display some of the details of a plan for presentation to others.

**2.1 [Worksheet printouts]{.underline}** can also be used as
documentation, and sometimes justification, for recommending a
construction project. The application is especially useful when two
alternative, feasible plans are under consideration. The printouts can
be used for description and justification exhibits in Construction Work
Plans and their amendments, Long-Range System Plans, and other studies.
RUS generally prefers that only one or two such exhibits be included in
such studies to serve as a sample of the economic analysis performed by
the engineer for the entire study. However, for the more costly,
complex, construction recommendations, the inclusion of additional
exhibits is appropriate.

# 3. AVAILABILITY

A copy of the RUS Workbook program can be obtained free of charge by
either of the following procedures:

**3.1 [Internet:]{.underline}** Download the file from the Internet. The
workbook file is available at the following Internet address:

**http://www.usda.gov/rus/electric/econplan.xls**

**3.2 [RUS Washington:]{.underline}** Request a copy of the file from
RUS by sending in a blank, DOS‑formatted, 3 1/2 inch disk (high density)
and a self-addressed mailer to:

Chief, Distribution Branch

Rural Utilities Service

STOP 1569

1400 Independence Avenue SW

Washington, DC 20250-1569

# 4. EXPLANATION OF WORKSHEET CALCULATIONS

The procedure and formulas used to calculate the displayed quantities on
the worksheets

in the workbook are explained below.

**4.1 [Worksheet "READ ME"]{.underline}** is a page of written
instructions for entering data. No calculations are performed on this
spreadsheet.

**4.2 [Worksheet "FCR"]{.underline}** is a form that can be used to
calculate the blended interest rate of construction loans and the fixed
charge rate (FCR) factors from data found on a borrower's completed RUS
Form 7. The formulas used to calculate the FCR factors and the FCR are
shown on the worksheet. (See Appendix A, Exhibit 2). These factors are
required for subsequent calculations.

**4.2.1** The fixed charge rate is the sum of the following rates:

-   Cost of capital (equals the cost of debt plus the cost of equity);

-   Taxes;

-   Depreciation;

-   Operations; and,

-   Maintenance.

**4.2.2** The fixed charge rate, when multiplied by the cost of a new
construction project, yields the annual "fixed charges." Thus, the fixed
charges are the annual interest expenses of the money borrowed to build,
plus the annual costs to operate and maintain a new construction
project.

**4.3 [Worksheet "INPUT"]{.underline}** is a form with instructions and
cells for entering certain economic, load and cost factors. This
worksheet may also be used to calculate the annual load factor (LdF) and
loss factor (LsF). The formulas used for all of the calculations are
shown on the worksheet. (See Appendix A, Exhibit 3).

**4.3.1** The LdF is used to determine the average hourly demand over a
one year period from a given annual peak kW demand. The LsF, which is
based on the LdF and empirical data, correlates demand and energy
losses. The LsF is used to calculate energy losses from the annual peak
kW demand of losses.

**4.3.2** The user may enter alternative FCR factors if those calculated
on Worksheet "FCR" are incomplete or unsatisfactory. If the user does
not enter values for the LsF or the FCR, then the procedure
automatically uses the values of 0.400 and 15.00, respectively. Any
other data that is not known may be assumed. Data has to be entered in
all of the shaded cells so that the final calculated results are
complete and meaningful.

**4.4 [Worksheet "PLAN 1"]{.underline}** is the form in which the user
enters the descriptions and present estimated costs of proposed
construction projects. The user also enters any anticipated changes in
kW losses. All of the formulas used and the calculations performed on
this worksheet are explained below, on a column by column basis,
beginning at the left side of the worksheet.

**4.4.1** "[CHANGES PEAK kW LOSSES" Column]{.underline}: A planned
future construction project will usually decrease, but sometimes
increase, a circuit's kW demand and kWh energy losses. If a future
change in kW losses is anticipated, then the user enters the amount of
the estimated or calculated annual peak kW losses change in the space
provided to the right of the item description. If a reduction in kW
losses is expected, a negative kW amount should be entered.

**4.4.2** "[INFLATED COST" Column:]{.underline} The present year
estimated cost entered for each construction item is inflated to the
year of construction by the using the following formula:

$$\text{Inflated}\text{Cost} = \text{Estimated}\text{Cost} \cdot (1 + \text{Inflation}\text{Rate})^{(\text{Yn} - \text{Yo})}$$

> $\begin{array}{r}
> \text{where:}\text{Yn} = \text{Year}\text{of}\text{Installation} \\
> \text{Yo} = \text{Present}(\text{first})\text{year}\text{of}\text{plan}
> \end{array}$

The above estimated cost is entered by the user on Worksheet "PLAN 1."
The Inflation Rate is the "Annual Increases of the Cost of New
Construction" entered on Worksheet "INPUT**."** The Inflated Cost is
displayed to the right of the present year estimated cost.

**4.4.3** ["PRESENT WORTH" Column:]{.underline} The present worth of
each of the Inflated Cost calculated above is determined by using the
following formula:

$$\text{Present}\text{Worth}\text{Cost} = \frac{\text{Inflated}\text{Cost}}{(1 + \text{Present}\text{Worth}\text{Rate})^{(\text{Yn} - \text{Yo})}}$$

> $$\begin{array}{r}
> \text{where:}\text{Yn} = \text{Year}\text{of}\text{Installation} \\
> \text{Yo} = \text{Present}(\text{first})\text{year}\text{of}\text{plan}
> \end{array}$$

The Present Worth Rate (for the Cost of New Construction) is entered on
Worksheet "INPUT**."** The above Present Worth Costs are displayed to
the right of the Inflated Cost of each construction item.

**4.4.4** "[FIXED CHARGES" Column:]{.underline} Each of the above
calculated Present Worth Costs are multiplied by the fixed charge rate
which is calculated on Worksheet "FCR" or alternatively entered on
Worksheet "INPUT." This product, which is the present worth of the Fixed
Charges for each construction item, is displayed to the right of each
calculated Present Worth Cost.

The Fixed Charges for the construction items are totaled for each year.
Next, the previous year's Accumulated Fixed Charges total is divided by
the factor (1+ Present Worth Rate). These two present worth quantities
are added together and displayed in bold fonts for each year in the Row
"TOTAL COST for Year" in the "FIXED CHARGES" Column.

The above Total Cost of Fixed Charges for each year is added to the
Accumulated Fixed Charges of the previous year and also displayed in
bold fonts for each year in the Row "ACCUMULATED through Year End."

**4.4.5** "[kW LOSSES" Column:]{.underline} The annual peak demand for
the first year is the same as the value entered by the user on Worksheet
"INPUT." Each subsequent year is calculated by multiplying the previous
year's annual peak kW losses by the factor: (1+ Growth Rate)^2^. To this
product is added the positive or negative value of any changes in peak
kW demand losses that has been entered for that year. The results are
shown as "Ann. Peak" in this column.

The above annual peak kW demand of losses is assumed to occur during the
one month of the year with the greatest total kW usage and demand
losses. The demands for the other 11 months of the year are almost
always less than the peak month. On Worksheet **"**INPUT" the user is
instructed to enter a monthly demand coincidence factor. By definition,
this factor, when multiplied by the annual peak demand, will yield an
average monthly billing demand. This coincidence factor varies greatly
from system to system and area to area. The determination of this factor
is left to the user.

The monthly average of kW losses is calculated by multiplying the annual
peak of kW losses, ("Ann. Peak" discussed above), by the coincidence
factor defined above. This monthly average is displayed as "Month Avg."
for each year. The calculated monthly averages of kW demand losses are
used later to calculate the annual cost of kW losses.

**4.4.6** "[kWh LOSSES" Column:]{.underline} The annual energy kWh
losses are calculated for each year using the loss factor (LsF)
calculated on Worksheet "INPUT", the annual peak kW losses discussed
above in Section 4.4.5, and the following formula.

$$\text{kWh}\text{Losses}(\text{Annual}) = \text{kW}\text{Losses}(\text{Ann}\text{.}\text{Peak}) \cdot \text{LsF} \cdot \text{8766}(\text{hrs/yr})$$

The kWh (Accumulated) Losses for each year is the sum the of the above
kWh Losses (Annual) for the year plus the kWh (Accumulated) Losses of
the previous year. Both the Annual and the Accumulated kWh losses for
each year are displayed in the "kWh LOSSES" Column.

**4.4.7** "[(INFLATED COST OF:) ANNUAL kW" Column]{.underline}: The cost
of kW demand losses are increased each year by the "Annual Cost Increase
for kW Demand" entered on Worksheet "INPUT." For each year, the cost of
the kW demand losses are calculated according to the formulas:

$$\begin{array}{r}
\text{Inflated}\text{Cost}\text{of}\text{Annual}\text{kW}\text{Losses} = \\
\text{Monthly}\text{Ave}\text{.}\text{kW}\text{Losses} \cdot \text{12}(\text{mo/yr}) \cdot \text{Demand}\text{Cost} \cdot (1 + \text{Ann}\text{.}\text{Cost}\text{Increase})^{(\text{Yn-Yo})}
\end{array}$$

$\begin{array}{r}
\text{where:}\text{Yn} = \text{Year}\text{of}\text{Installation} \\
\text{Yo} = \text{Present}(\text{first})\text{year}\text{of}\text{plan}
\end{array}$

The Monthly Average of kW Losses is discussed above in Section 4.4.5.
The Demand Cost is entered on Worksheet "INPUT."

Then, for each year, the present worth of the above Inflated Cost of
Annual kW losses is calculated using the following formula:

$$\text{Annual}(\text{Present}\text{Worth})\text{Cost}\text{kW}\text{Losses} = \frac{\text{Inflated}\text{Cost}\text{of}\text{Annual}\text{kW}\text{Losses}}{(1 + \text{Present}\text{Worth}\text{Rate})^{(\text{Yn} - \text{Yo})}}$$

> $\begin{array}{r}
> \text{where:}\text{Yn} = \text{Year}\text{of}\text{Installation} \\
> \text{Yo} = \text{Present}(\text{first})\text{year}\text{of}\text{plan}
> \end{array}$

The above Present Worth Rate is entered on Worksheet "INPUT" as "Present
Worth Rate for Cost of Losses (%)." The above Annual (Present Worth)
Cost of kW Losses is displayed in bold fonts for each year on the
worksheet in the "ANNUAL kW" Column and in the Row "TOTAL COST for
Year."

The Accumulated (present worth of the inflated) Cost of Annual kW Losses
is calculated for each year by adding the Annual Cost of kW Losses for
the year to the Accumulated Cost of kW Losses for the previous year.
This accumulated total is displayed in bold font for each year in the
Row "ACCUMULATED through Year End."

**4.4.8** "[(INFLATED COST OF:) ANNUAL kWh" Column]{.underline}: The
present worth of the inflated annual cost of kWh energy losses is
calculated according to the following steps.

$$\begin{array}{r}
\text{Inflated}\text{Cost}\text{of}\text{Annual}\text{kWh}\text{Losses} = \\
\text{kWh}\text{Losses}(\text{Annual}) \cdot \text{Energy}\text{Cost} \cdot (1 + \text{Ann}\text{.}\text{Cost}\text{Increase})^{(\text{Yn} - \text{Yo})}
\end{array}$$

> $\begin{array}{r}
> \text{where:}\text{Yn} = \text{Year}\text{of}\text{Installation} \\
> \text{Yo} = \text{Present}(\text{first})\text{year}\text{of}\text{plan}
> \end{array}$

The kWh Losses (Annual) is calculated as discussed in Section 4.4.6. The
Energy Cost and Ann. Cost Increase (for energy) are entered on Worksheet
"INPUT." The above calculated quantity is displayed in the "ANNUAL kWh"
Column for each year.

Then, the present worth of the above Inflated Cost of Annual kWh Losses
is calculated for each

year using the following formula:

$$\text{Annual}(\text{Present}\text{Worth})\text{Cost}\text{kWh}\text{Losses} = \frac{\text{Inflated}\text{Cost}\text{of}\text{Annual}\text{kWh}\text{Losses}}{(1 + \text{Present}\text{Worth}\text{Rate})^{(\text{Yn} - \text{Yo})}}$$

$\begin{array}{r}
\text{where:}\text{Yn} = \text{Year}\text{of}\text{Installation} \\
\text{Yo} = \text{Present}(\text{first})\text{year}\text{of}\text{plan}
\end{array}$

The Present Worth Rate (for the cost of losses) is entered on Worksheet
"INPUT." The above present worth of the Inflated Cost of Annual kWh
Losses are also displayed for each year, in bold fonts, on the worksheet
in the "ANNUAL kWh" Column and in the Row "TOTAL COST for Year."

The Accumulated (present worth of the inflated) Cost of Annual kWh
Losses is calculated for each year by adding the above Annual Cost of
kWh Losses to the previous year's Accumulated Cost of kWh Losses. This
accumulated total is displayed in bold fonts for each year in the Row
"ACCUMULATED through Year End."

**4.4.9** [Year Cost Totals (Rows):]{.underline} Two cost totals are
displayed for each year of the plans next to the year number. The top
number is the total cost for the year and the bottom number is the
accumulated yearly costs through the end of the year. Both totals are
the sum of the yearly displayed cost of fixed charges plus the annual
cost of the kW demand and the kWh energy losses. All of the totals,
displayed in bold font, are present worth costs.

**4.5 [Worksheet "PLAN 2"]{.underline}** is identical to "PLAN 1" in
form and calculations. Both worksheets use the same economic and losses
factors. This alternative plan can be used to compare the cost of
construction and losses of two plans that each resolve the same electric
system deficiency.

**4.6 [Worksheet "COMPARE"]{.underline}** displays, in tables and bar
graphs, the total accumulated costs and MWh energy losses from
Worksheets "PLAN 1" and **"**PLAN 2" for the first 6 years and every
5 years thereafter. The tables and graphs conveniently summarize and
exhibit entered economic factors and the final results of the procedure
used.

# 5. EXPLANATION OF RESULTS

The year by year, accumulated totals of the present worth of the
inflated costs of the fixed charges plus losses are considered the final
results of this procedure. The accumulated total cost for any given year
is the theoretical present year cash required to finance the plan
through that given year. It is assumed that a portion of the theoretical
cash on hand is earning interest at the cost of capital rate; the
remaining portion of the cash on hand is earning interest at the entered
present worth rates. The present worth rates may be the blended interest
rate, the rate of return on investments, the inflation rate or another
rate and basis adopted at the discretion of the user.

# 6. SENSITIVITY ANALYSIS

Nearly all of the numerical data entered on the worksheets is either
assumed or estimated. Thus, the calculated cost results are only
accurate within some unknown range. The user can easily vary each of the
input variables, individually or in combination, through reasonable
ranges and monitor the new calculated cost totals. This sensitivity
analysis will reveal total cost ranges and trends. This analysis may
also give the user a perception of accuracy percentages and confidence
levels of the final results. Performing this sensitivity analysis is a
simple process and especially useful when comparing alternative plans
whose calculated total costs nearly equal.

# EXHIBIT 1: Worksheet "READ ME"

![](media/image1.emf)

# EXHIBIT 2: Worksheet "FCR"

![](media/image2.emf)

# EXHIBIT 3: Worksheet "INPUT"

![](media/image3.emf)

# EXHIBIT 4: Worksheet "PLAN 1" (First 9 of 30 years)

![](media/image4.emf)

# EXHIBIT 5: Worksheet "PLAN 2" (First 9 of 30 years)

![](media/image5.emf)

# EXHIBIT 6: Worksheet "COMPARE"

![](media/image6.emf)

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    Microsoft Corporation