Module 2_Introduction to Economic Analysis

What measure of correlation is a number between -1 and 1 that measures the degree to which two variables are linearly related?

Correlation Coefficient

What quantifiable benefit is a reduction or elimination of some future requirement? (the implementation of a new requirement does not require purchase or degrade current capability)

Cost Avoidance

What quantifiable benefit result in the actual reduction of an approved program if the benefits occur during the POM Period?

Cost Saving

What are the three basic types of quantifiable benefits?

Cost Saving Cost Avoidance Productivity Improvement

What is the result of comparing Budgeted Cost of Work Performed (BCWP) to the Actual Cost of Work Performed (ACWP) ACWP < BCWP is favorable, the contractor is performing the work at a cost less than planned. ACWP >BCWP, the cost variance is unfavorable, the contractor is performing the work at a cost greater than planned.

Cost Variances (CV)

What year dollars (then-year dollars) are expressed in the value of the year in which a cost is expected to occur, and therefore reflect the effect of inflation.

Current dollars

If we think that a linear relationship may exist between the variable, we can plot the data to determine a "best fit" straight line through the data. This is called what?

Linear regression

What costs are past expenditures from prior fiscal years?

Sunk Cost

Section 2434, Chapter 144, Title 10 requires that SECDEF consider an ___________ of the life cycle of a MDAP (i.e ., ACAT I) program prior to granting Milestone B and Milestone C approval.

independent cost estimate

What is inferential statistics?

methods used to examine a sample of a population and make inferences about the entire population based on analysis of the sample data.

If a correlation coefficient is -1 it has a ?

negative correlation (strong predictability)

An economic analysis (EA) is prepared using a ______ basis in compliance with applicable DoD guidance.

net present value (NPV)

Your supply department has 100 engines in inventory of January 1. On February 1, your engine inventory was only 75. How much did your inventory change from January? Calculate the percentage change.

((75-100) / 100) * 100 = 25%

How do you calculated a percentage change?

(New# - Old#) I Old #) X 100 = % change

What frequency distribution is a bar graph in which the frequencies are represented by the length of the bars?

Histogram

For ACAT I and ACAT ID, the independent cost estimate (ICE). performed by the _______ , in OSD, is prepared to check the accuracy and objectivity of the estimate.

D, CAPE (Director of Cost Analysis and Program Evaluation)

What are the two distinct disciplines of statistics?

Descriptive Statistics Inferential Statistics

What chart is better at displaying the schedule and resources used in a project?

GANTT Chart

To apply the learning curve rate in cost estimating use this formula: Previous hours * Learning Curve Rate = Hours to complete next doubled quantity 2nd unit hours = 3 hours 90% Learning Curve Rate Therefore: (3 hours) *(90% Learning Curve Rate) = 2.7 hrs for the 4th unit

How to estimate the learning curve

Consider opportunity for a new investment that will cost $1,000,000 with annual operating costs of $50,000 per year. The system is being proposed to replace the current capability that costs $300,000 per Ir to operate. The breakeven will occur when?

Investment / saving Investement = 1,000,000 Saving = 300,000 - 50,000 1,000,000 / 250,000 = 4 years

What frequency distribution can be use to group data into a distribution that has multiple data points on one or the end of the spectrum.

Skewed Distribution

What measure of dispersion measure of how a set of values is spread around the mean. It is usually denoted with the Greek letter a (lowercase sigma). It tells whether values fall close to the mean value or if they are widely dispersed.

Standard deviation

How are standard deviation useful in economic analysis?

Standard deviation has many uses in economic analysis. It can be used: To quantify cost risk To quantify uncertainty To quantify relationships between cost drivers and cost objects

What cost estimate method is a "bottom-up" method of cost analysis that is the most detailed of all the techniques and the most costly to implement. It requires the analyst to have an extensive knowledge of the system characteristics. It as known as the industrial engineering approach. This method says" we are starting from scratch". What are its strength and weakness?

The engineering approach Strengths: Very accurate in later stages of Engineering and Manufacturing Development. and limited subjectivity Weaknesses: Very expensive, very time-consuming, and difficult to do 'What-if drills

True or False. Different cost estimate methods are more appropriate at different points in time of the acquisition process.

True

If a population for a normal distribution is distributed about the mean within one standard deviation (+ or -), what percentage of the population will we find?

Within one standard deviation each side (+ and -) of the mean, we will find 68.27% of the population.

If a population for a normal distribution is distributed about the mean within three standard deviation (+ or -), what percentage of the population will we find?

Within three standard deviations each side (+ and -) we will find 99.73% of the population.

Are Non-quantifiable benefits((qualitative) more subjective in nature?

Yes

Performance measurement techniques can be used to assess the health of a program or project. Performance measurement is basically the comparison of actual performance against an established_____ plan.

baseline plan

The economic analysis is initially prepared in constant base year (present value) dollars , and presents a ______ cost display by year over the project's expected economic life, beginning with the first budget year for which investment funds are needed for any alternative, and ending when the alternative with the greatest economic life ceases to produce benefits.

differential

The break-even point, or payback, normally_____consider the time value of money.

does not

The learning curve theory implies that as the quantity of production ________, the labor hours per unit expended to produce the product ________ at a fixed rate or constant percentage.

doubles, deceases

Percentage changes, from the starting value to the ending value, are expressed as_____ changes for increases and negative changes for __________.

positive, negative

They key costs reflected in EA are expressed in ?

present value, (that is, they are adjusted by discount rates to reflect the time value of money)

A proportion is a statement of equality between two categories. How can proportion be used?

to compare items or individuals in one category to items or individuals in all categories. Number of items in one category / number of items in all categories

There are no mandated thresholds just for using economic analyses for DoD applications. Different types of programs will have different requirements. A threshold of___ applies to construction. Therefore. $1 million may be considered a reasonable level to require an economic analysis for other type programs.

$1 million

Proportion and percentage both describe comparisons of items or individuals in one category to items or individuals in all categories. Proportion is expressed as what?

A ratio

Tactical missiles follow an 85 to 92 percent learning-curve slope. This means that every time the production quantity of a particular tactical missile doubles (for example, from unit number 8 to unit 16), unit labor-hour cost is reduced to 85 to 92 percent of the previous unit's labor-hour cost. This is an 8 to 15 percent cost reduction (100%-92% =8% and 100%-85% = 15%).

In other words, the cost to produce unit 16 is anywhere from 8 to 15 percent less than the cost to produce unit 8

What are the steps in PERT chart?

PERT planning involves the following steps: Identify activities and milestones Determine the proper sequence of the activities Construct a network diagram. Estimate the time required for each activity.

What cost estimate method is known as Statistical Method or Top down Method. It is based on physical attributes or performance characteristics and their relationships to highly aggregated component costs. This method uses a database of elements from similar and multiple systems to establish valid relationship among the attributes or elements that make up the alternative and its costs? What are its strength and weakness?

Parametric Approach Strengths: Use CERs, Easy to do what if drills, Inexpensive Weaknesses: Moderately subjective, Precision only as good as the data

Earned Value Management is structured around multiple work packages to complete the contract. Each work package consists of a scope of work and it's related budget. The result is known as the Budgeted Cost of Work Scheduled (BCWS), which is also called the?

Performance Measurement Baseline (PMB),

If a correlation coefficient is 1 it has a ?

Positive correlation (strong predictability)

What does Coefficient of Variation measure? It measures the amount of dispersion expressed as a decimal or a percentage. It helps explain how much variability exist between the variables.

Predictability

Coefficient of Determination and Coefficient of variation are two tools used in regression analysis to help us understand what ?

Predictability and reliability of the data

Many external factors are involved in making a decision. For example, safety, health, morale, Pollution control, political considerations, and national priorities are often considerations. However, EA can rarely provide the sole basis on which a program or project will be approved or disapproved. What are the limitation of EA?

Produce results that are more valid than input data (in other words, garbage in - garbage out) Make final decisions Be applied with cookbook precision Provide relevant solutions to irrelevant questions and problems Predict political or non-economic impacts . Be a substitute for sound judgment, management or control.

What quantifiable benefit is a reduction in future personnel time and effort requirements associated with a function or assigned task that has been included in an approved program? This enable the organization to accomplish more work with existing personnel.

Productivity Improvement

Which chart or 'the network diagram' represents activities and milestones identified graphically represented by connected arcs and nodes.

Program Evaluation and Review Technique (PERT)

What are two types of inferential statistics?

Proportion and Percentage; and Measures of Correlation

What are quantifiable benefits?

Quantifiable benefits are benefits that can be assigned a numeric value, such as dollars, physical count of tangible items, or percentage of change.

What measure of dispersion describe the limits of a sample of data? How do you calculate this measure of dispersion?

Range To calculate Range, subtract the smallest number from the largest number. Example: 5,9,11,3616 = 3616-5= 3611 The range is 3611

What does Coefficient of Determination measure? It is simply the square of "r" or the square of the correlation . It tells us how reliably the data will fall directly on the 'best fit' line.

Reliability

What is the result of comparing the Budgeted Cost of Work Performed (BCWP) to the Budgeted Cost of Work Scheduled (BCWS) BCWP >BCWS, the result is positive since the contractor has done more work than planned. BCWP < BCWS, the result is unfavorable since the contractor did less work than he had planned.

Schedule Variance (SV)

What type of contract provide for firm price and the contractor profit is built into the price. In this type of contract, the majority of the risk is on the contractor. The higher the contractor perceives the cost risk to be, the higher the contractor will set the price to protect the company?

Fixed Price Contract

There are two basic type of contracts. What are they?

Fixed price contract and cost-reimbursable contracts

What descriptive statistics are arrangements of values that show the number of times that a given value occurs? The most common are histograms and frequency polygons

Frequency distributions

What frequency distribution is a line graph formed by connecting the frequencies of the values? It is helpful in comparing sets of data and displaying cumulative frequency distributions.

Frequency polygons

What expert opinion method is used to narrow a range of expert opinion to achieve consensus?

The Delphi technique

What regulation provides guidance in the contracting, and requires that contracts adhere to the concept of allowable within the law, reasonable within the law and assignment of responsibilities?

The Federal Acquisition Regulation

The contracting process is governed by what regulation?

The Federal Acquisition Regulation and the Defense Acquisition Regulation

What is a significant benefit of inferential statistics?

The ability to make projections of the future from samples of data we captured.

What cost estimate method uses actual costs contracted for or actually incurred on the same system during an earlier period, which are then projected to future events of a similar nature. , This approach benefits from actual previous procurement of the same item. What are its strength and weakness?

The actual cost approach Strengths: Little subjectivity and very accurate Weaknesses: Limited applicability, the budget may already be submitted

What are some example of non-quantifiable benefits that should be addressed qualitatively in EA?

Adaptability-meet required standards Availability --When available Functionality--How well does it perform Maintainability--readily available Morale--constitute to positively to employee work Productivity--number of product increase Security --what are the precautions Upgradabllity--How does compare with existing equipment Versatility ---will it have additional capablities

What is Economic Analysis (EA)?

An economic analysis is a systematic approach to the problem of choosing the best method of allocating scarce resources to achieve a given objective. Recognizes there are alternative ways to meet the stated objective. Studies each alternative, assessing the required resources and anticipated results.

When is break even analysis normally use?

Break-even analysis is most commonly used in decision-making when projects are high risk, and it desirable to recover investment costs quickly, or when it is desirable for political reasons to quickly generate economic benefits. Break-even analysis is normally performed using undiscounted current dollars.

What year dollar are the result of having the effects of inflation removed?

Constant dollars

What is a means of translating resource requirements (inputs) associated with programs, projects, and processes (outputs) into estimated dollars.

Cost-estimating

What type of contract promises to pay all allowable, allocable, and reasonable costs incurred on the contract. If the cost of the contract goes up the govenrment must pay. It this type of contract the government bears significant risk?

Cost-reimbursement contracts

What discipline of statistics tell a story about the data, it do not extend beyond that data and do not project or infer to anything outside a specific data?

Descriptive Statistics

What is an integrated tool that relates technical performance to its associated cost and schedule, measures the work progress in objective terms, and states the value of the work completed in dollars. The term "Cost Loaded Schedule may be used instead.

Earned Value Management (EVM)

What are the major steps in EA preparation?

Establish objective. Formulate assumptions. Identify constraints. Determine/identify alternatives. Estimate cost and benefits of each alternative. Compare alternatives Perform sensitivity analysis (risk) Report results and recommendations

What cost estimate method uses the subjective judgment of an experienced individual or group. Estimates developed on this basis usually lack detailed rationale and analysis. What are its strength and weakness?

Expert Opinions Strengths:Quick rough order of magnitude (ROM)...sanity check Weakness: highly uncertain

What theory is based on the observed phenomenon that as the total quantity of units successively produced in a repetitive manufacturing process increases, the cost or number of labor hours required to produce successive units will decrease in a predictable manner?

Learning curve theory

What measure of central tendency is the arithmetic average of a distribution and is useful for tracking trends in data?

Mean (7+7/2) (shows trends)

What descriptive statistics reveals how data are grouped and what is typical about them. It measures are the mean, median and mode.

Measure of Central Tendency

What are the most common types of descriptive statistics?

Measures of Central tendency Measures of Dispersion Frequency Distribution.

What descriptive statistics indicates how the data are distributed as a whole. It most common measures are the range and standard deviation?

Measures of dispersion

What measure of central tendency is the 'middle value' in a list of numbers, after sorting the list in increasing order.

Median (take into account outliers) Example: 12345= 3 Example: 1,2,3,4,4,5= 3+4/2

What measure of central tendency is the most frequently occurring score in a distribution of scores.

Mode (little information by itself) Example: 1,2,3,3,4,5; mode is 3

If a correlation coefficient is 0, it has ?

No linear relationship between the variable. Typically, any value greater than 0.8 or less than -0.8 is a strong correlation, whereas, values between -0.5 and 0.5 are considered a weak correlation.

What are some examples of Quantifiable benefits?

Number of meals served Hours flown Components manufactured Flight hours per month Number of repairs per items per year

Estimates prepared in constant dollars do not show the changing spending power of the dollar over time. When estimates are used for programming and budgeting, they must be adjusted for inflation, OMB is responsible for developing inflation guidance by appropriation for government estimate. OMB distributes inflationary guidance normally every January. What is the name of the OMB Circular?

OMB Circular A-94, Inflationary Guidance

What cost estimate method is based on direct comparison with historical information of one similar existing activity, system or component for which there are accurate cost and technical data. This method essentially says the new item "looks like an existing item" for which actual cost data are available. What are its strength and weakness?

The analogy approach Strengths: Quick, Inexpensive, Easy to change Weaknesses: Subjective and Imprecise

What two measures of correlation tools (combine) helps to predict data better and provide a reliability factors that can help in making projections?

Two tools combined provide this confidence: Measure of Correlation and Linear Regression

If a population for a normal distribution is distributed about the mean within two standard deviation (+ or -), what percentage of the population will we find?

Within two standard deviations each side (+ and -) we will find 95.45% of the population.

In EA, all costs and benefits are _______ to "present value" by using given discount factors to account for the time value of money.

adjusted

Name the various cost-estimating methods that are used to estimate dollars of what must be spent on the program, project, or process over its life cycle to translate resource requirement into budget requirements.

analogy parametric engineering actual cost expert opinion

The primary basis of an EA is the comparison of estimated costs against __________.

anticipated benefits (and evaluation of costs and benefits among multiple alternatives)