Assessing approximation errors caused by truncation of cash flows in public infrastructure net present value calculations

Abstract

Life cycle costing analysis for public infrastructure assets is not a straight forward exercise and may be sensitive to input data and calculation approaches. In general alternatives are compared on net present value (NPV) of life cycle costs (LCC) over a bounded calculation horizon. However, alternatives may differ in life cycle characteristics. Issues to address include the chosen calculation horizons, the truncation method for the end of horizon cash flows, the discount rates and inflation rates. This study investigates the deviations of NPV calculations with horizons of 100, 200 and 300 years with an NPV calculation over an infinite time hori-zon. Three public infrastructure asset case studies with their specific LCC characteristics are considered: a bridge, a high way and a dike revetment. A sensitivity analysis for the discount rate and differential inflation is performed. This study develops generic guidelines for approximation errors as a consequence of a premature truncation of cash flows in public infrastructure LCC calculations.