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8.2 Planning
The problem of projecting future demands may be subdivided into two parts, namely, selection of (1) the
planning period and (2) the projection technique.
Selection of Planning Period
In order to assess all the impacts of a project, the planning period should be at least as long as the
economic life of the facilities. The U.S. Internal Revenue Service publishes estimates of the economic life
of equipment, buildings, etc. This is especially important for long-lived facilities, because they tend to
attract additional demand beyond that originally planned for.
Buildings have economic lives on the order of 20 years. For large pipelines, the economic life might
be 50 years, and dams might have economic lives as long as 100 years. The U.S. Government usually
requires a planning period of 20 years for federally subsidized projects. Usefully accurate projections,
however, cannot be made for periods much longer than 10 years. The demands projected for the economic
life of a project cannot, therefore, be regarded as likely to occur. Rather, the projected demands set the
boundaries of the problem. That is, they provide guides to the maximum plant capacity, storage volume,
land area, etc., that might be needed. Preliminary facilities designs are made using these guides, but the
actual facilities construction is staged to meet shorter-term projected demands. The longer-term projec-
tions and plans serve to guarantee that the various construction stages will produce an integrated, efficient
facility, and the staging permits reasonably accurate tracking of the actual demand evolution.
Optimum Construction Staging
The basic question is, how much capacity should be constructed at each stage? This is a problem in cost
minimization. Consider Fig. 8.3. The smooth curves represent the projected demand over the economic
life of some sort of facility, say a treatment plant, and the stepped lines represent the installed capacity.
Note that installed capacity always exceeds projected demand. Public utilities usually set their prices to
cover their costs. This means that the consumers generally will be paying for capacity they cannot use,
and it is desirable to minimize these excess payments on the grounds of equity and efficiency.
The appropriate procedure is to minimize the present worth of the costs for the entire series of
construction stages. This is done as follows. The present worth of any future cost is calculated using the
prevailing interest rate and the time elapsed between now and the actual expenditure:
(8.15)
PW C it
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j
n
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=
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