SEEFAR-Valuation© Frequently Asked Questions

Is the discount Rate taken into account in the SEEFAR-Valuation© model?

 While I understand that the notion of a discount is deeply engrained in the thinking around project assessments, and is essential for comparing the cash flow value of investments, the SEEFAR-Valuation© is based on a cost assessment not a cash flow assessment.  Since the SEEFAR-Valuation process builds into the cost calculations an allowance (assumption) to reflect the escalation rate for future costs, in doing so it accounts for the inflationary value reduction of future dollars.

Most importantly, the SEEFAR-Valuation© does not treat savings as a cash flow stream so a discount rate is not applicable.  What the SEEFAR-Valuation© does is compare the Total Cost of Building Ownership (TCBO) on a whole building design basis over the useful life of the building.  Since all cost elements have an inflationary factor option that can be built into the projected values, it allows investors to make an informed decision on the basis of COST and not CASH FLOW.

While the difference in cost between any two options could be subsequently treated as a cash flow stream and therefore discounted, it offers very little insight into which design optimizes the investment.  Since you can determine the difference in cost over time, treating this difference as if it were a cash flow would not add clarity to the selection process.  The SEEFAR-Valuation© allows an investor to make an informed decision based on projected cost, and cost difference.

The assumption that a discount rate is needed, would be based on the assumption that you need to know the future return on savings in order to make an informed decision.  This is not the case.  Since any scenario that is assessed using the SEEFAR-Valuation© will produce a cost difference, and the same discount rate would be applied to all cost savings, the difference in value would remain the same on a relative basis, so knowing this adds no real value.

For example, if the outcome of a SEEFAR-Valuation© produces a cost savings of $500,000 over 60 years, what would discounting this value accomplish in terms of informing an investor about the best option?