UNITED STATES DEPARTMENT OF AGRICULTURE
Rural Utilities Service

Bulletin 1724D-104


SUBJECT:  An Engineering Economics Computer Workbook Procedure

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
1.  GENERAL DESCRIPTION	3
2.  USES FOR THE WORKBOOK ANALYSIS	4
3.  AVAILABILITY	4
4.  EXPLANATION OF WORKSHEET CALCULATIONS	4
5.  EXPLANATION OF RESULTS	9
6.  SENSITIVITY ANALYSIS	9
EXHIBIT 1:  WORKSHEET READ ME	10
EXHIBIT 2:  WORKSHEET FCR	11
EXHIBIT 3:  WORKSHEET INPUT	12
EXHIBIT 4:  WORKSHEET PLAN 1 (FIRST 9 OF 30 YEARS)	13
EXHIBIT 5:  WORKSHEET PLAN 2 (FIRST 9 OF 30 YEARS)	14
EXHIBIT 6:  WORKSHEET COMPARE	15




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.   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 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 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 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 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:  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:  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 is a page of written instructions for entering data.  No calculations 
are performed on this spreadsheet.


4.2  Worksheet FCR 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 borrowers 
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 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 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:  A planned future construction project will 
usually decrease, but sometimes increase, a circuits 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:  The present year estimated cost entered for each 
construction item is inflated to the year of construction by the using the following formula:

 

	 

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:  The present worth of each of the Inflated Cost calculated 
above is determined by using the following formula:

 

 

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:  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 
years 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:  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 years 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:  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.

 

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:  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:

 
	
	 

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:

 
	
   	 

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:    The present worth of the inflated 
annual cost of kWh energy losses is calculated according to the following steps.

 

		 

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:

 

		 

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 years 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):  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 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 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


 

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

 

  Microsoft, Excel and Windows are registered trademarks of the Microsoft Corporation
Bulletin 1724D-104
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Bulletin 1724D-104
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Bulletin 1724D-104
Appendix A
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Bulletin 1724D-104
Appendix A
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Bulletin 1724D-104
Appendix A
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