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<br />e <br /> <br />e <br /> <br />e <br /> <br />Cost-Effective <br />Projects <br />I <br /> <br />Who Does the <br />Analysis? <br /> <br />Guidance on <br />Cost- <br />Effectiveness <br />Review <br /> <br />What "Cost- <br />Effective" <br />Means <br /> <br />Net Present <br />Value <br /> <br />Guidance and <br />Discount <br />Rates for <br />Benefit-Cost <br />Analysis of <br />Federal <br />Programs <br /> <br />Section 9: Cost-Effectiveness <br /> <br />The Stafford Act and its implementing regulations require that HMGP 1Il <br />projects be cost-effective (44 CFR 206.434(b)). A benefit-cost <br />analysis should be performed in order to determine how the <br />anticipated value of the project compares to the cost. 44 CFR 206.434(bl <br /> <br />FEMA encourages States to do benefit-cost analyses of projects they submit for <br />funding. Otherwise FEMA staff will complete it. Managing States generally always <br />conduct the analyses. When Stales submit benefit-cost analyses with projects, FEMA <br />may verify the results using its software. <br /> <br />This section describes the benefit-cost model used by FEMA to determine the cost- <br />effectiveness of a hazard mitigation project, and discusses the documentation <br />applicants should include when submitting an application to the State for review. <br /> <br />For HMGP projects to be considered cost-effective, a project has to return more money <br />over its life than it cost initially. The "return" is money saved because a mitigation <br />project reduces or prevents damages from a flood, hurricane, earthquake, or other <br />natural hazard event. <br /> <br />According to 44 CFR 206.434(b)(5)(ii) to be eligible for a grant, <br />projects must "not cost more than the anticipated value of the <br />reduction in both direct damages and subsequent negative impacts to <br />the area if future disasters were to occur. Both costs and benefits will <br />be computed on a net present value basis.' <br /> <br />1Il <br /> <br />44 CFR <br />206.434(b)(5)(ii) <br /> <br />Net present value is the total value of benefits over a project's life, discounted at a rate <br />given to FEMA by the Office of Management and Budget (OMB). Inflation and <br />investment value are two factors that demonstrate the standard economic principle that <br />a $1 benefit received in the future is not the same as a $1 benefit received today. The <br />State or FEMA use this method to determine net present value. <br /> <br />OMB directs most Federal agencies on how to determine cost-effectiveness for their <br />programs. OMB Circular A-94, Guidelines and Discount Rates for Benefit-Cost <br />Analvsis of Federal Proarams, is the guidance FEMA is required to use in this area. <br />Circular A-94 describes the economic principles and methods by which most Federal <br />programs, including the HMGP, must analyze and verify the cost-effectiveness of <br />projects they fund. <br /> <br />Hazard MItigation Grant Program Desk Reference-Draft <br /> <br />Page 9-1 <br />