Financial analysis of military capital projects

The private sector uses discounted cash flow models to appraise capital projects and adapts these techniques to evaluate long-term capital projects regardless of the budgeting and control methods employed (zero-based, incremental, hybrid forms). But the public sector lacks a process for easily quantifying the measure of a project's output or the benefit it generates. Private sector capital projects compare some measure of cash flows; public sector capital projects only rarely use cash flows as a measure of the benefits received. This article examines two discounted cash flow models--net present value and equivalent annual charge--which are most directly applicable to public sector capital projects. It lists the five types of capital project cash flows and three ways of measuring project life. It then outlines the discounted cash flow models and explains the formulas that each uses.