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Implementation Plan ~ ."., c:c ... Cost effectiveness is defined as the program's cost per ton of salt prevented from entering the river system or removed from the river system, Conceptually, cost effectiveness (cost per ton) is analogous to determining the cost per mile to own and operate a cat, That computation combines the annual cost of loan payments with the annual operating expenses (gas, maintenance, etc,) and divides this by the miles travelled each year, The key to understanding this approach is to appreciate that even though the Government may not necessarily borrow money to construct facilities, the program evaluates all projects as if the money is borrowed from a lending institution and repaid in annual installments, This process yields an annual cost to match the annual salt removal, or cost per ton, This economic evaluation principle is required by the Economic and Environmental Principles and Guidelines for Water and Related Land Resources Implementation Studies, March 1983, It also lends consistency in the comparison of federally financed projects to non-federally financed alternatives proposed by those who must borrow funds, Computing Cost Effectiveness for Non-federally Financed Projects.- Typically, the fee paid by the program per ton of salinity control is the project's cost effectiveness, If the fee per ton varies through time, the costs must be averaged (time-valued) by capitalizing the costs and then annualizing them to get a time-valued average cost, Both capitalization and annUalization use the same interest rates used in all projects (currently about 8 percent), This process accounts for the time value of money, An arithmetic average of the nominal payments does not properly account for this value, For example, two projects with the same arithmetic average could have two completely different payment patterns, A proposal with high payments upfront is not as economically desirable as one that delays costs to the program, Time-valuing the privately financed proposals adjusts them to be fully comparable to the upfront funding and time-valuing of federally financed alternatives, Computing Cost Effectiveness for Federally Financed Projects.- Cost effectiveness is computed in three steps by: Step 1 Annualize the One. Time Costs: The capital costs of the project are converted to annual costs by amortizing the capital costs much like the cost of a house that is mortgaged to find the monthly payments; but in this case, the payment (or annual cost) is an annual value, The costs are amortized over the expected life of the project at the current planning interest rate (currently about 8 percent), The costs should include all one-time capital costs to the program for technical assistance, education, overhead, wildlife replacement, other mitigation, design, construction, and other construction-related costs, 12