New Approaches to Defense Inflation and Discounting

New Approaches to Defense Inflation and Discounting

Kathryn Connor
James Dryden
Copyright Date: 2013
Published by: RAND Corporation
Pages: 62
https://www.jstor.org/stable/10.7249/j.ctt5hhsk2
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  • Book Info
    New Approaches to Defense Inflation and Discounting
    Book Description:

    To assess how well current inflation indices and discount rates serve weapon-system program management, this study investigates inflation rates for parts for the Abrams and Bradley ground vehicles. Because even similar systems experience inflation differently, estimating strategies should be reviewed annually to reflect changing costs, and analysis of investments should be expanded to ensure consideration of least-cost outcomes.

    eISBN: 978-0-8330-8339-5
    Subjects: History, Technology

Table of Contents

  1. Front Matter
    (pp. i-ii)
  2. Preface
    (pp. iii-iv)
  3. Table of Contents
    (pp. v-vi)
  4. Figures
    (pp. vii-viii)
  5. Tables
    (pp. ix-x)
  6. Summary
    (pp. xi-xvi)
  7. Acknowledgments
    (pp. xvii-xviii)
  8. Abbreviations
    (pp. xix-xx)
  9. CHAPTER ONE Introduction
    (pp. 1-4)

    The Department of Defense (DoD) has long recognized that cost estimates related to major weapon systems must take into account the total lifetime costs of the systems, from their initial development to their disposal. Once a weapon system is produced, its operation and maintenance (O&M) includes all programmatic aspects of system supportability, including maintenance, repair, modifications, upgrades if warranted, demilitarization, and safe disposal. Early in the acquisition process, DoD cost estimators use current inflation indices and discount rates to compare the sustainment (or support) costs of different systems. These tools are required in the final selection among alternatives, as they...

  10. CHAPTER TWO Cost Inflation of Ground-Vehicle Parts
    (pp. 5-20)

    This chapter assesses and compares three different methodologies used to calculate inflation costs related to weapon-system O&M. Cost estimators rely on inflation indices to normalize data from disparate time periods, but inflation indices are built for DoD on very broad categories that include system O&M as well as manpower, procurement, and research and development. These indices do take into account the effect inflation has on weapon-system and personnel budgets, but questions remain as to how well they reflect O&M realities at an individual system level. We focus upon ground-vehicle parts for the Bradley and Abrams vehicles to demonstrate this deficiency...

  11. CHAPTER THREE The Value of Discounting
    (pp. 21-28)

    This chapter discusses the use of discounting to address the time value of money in DoD decisionmaking. Government discounting applications are reviewed and recent OMB discounting guidance used in making decisions related to O&M is presented. We then specifically address the use of discounting in DoD decisionmaking, which may sometimes lead to decisions that do not benefit DoD. We are particularly interested in how discounting may impact the decision to invest in an additional program or weapon system. Programs often compete for limited funds, and decisions may change the allocation of funding but may not change the DOD “top line”...

  12. CHAPTER FOUR New Approaches to Inflation and Discounting
    (pp. 29-32)

    Escalating for inflation and analyzing net present value (discounting) are second nature for weapon programs and cost estimators, but they currently rely on aggregate measures rather than system-specific measures. We propose that using a more nuanced approach to inflation and discounting will ensure that estimates more accurately reflect the costs that future programs will experience. We offer some recommendations to help cost estimators inform program decisionmakers, as well as future policy and guidance that CAPE can encourage.

    Comparisons of the specific indices for the Abrams and Bradley vehicles with the official index show that the experience of each system with...

  13. APPENDIX Inflation Estimates over Time
    (pp. 33-38)
  14. Glossary
    (pp. 39-40)
  15. Bibliography
    (pp. 41-42)