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When $1 today is worth $2.50 tomorrow

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A look at life-cycle costs and financial implications to major purchases in the public sector

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When $1 today is worth $2.50 tomorrow

  1. 1. When $1 Today is Worth $2.50 Tomorrow Brian Gongol DJ Gongol & Associates, Inc. June 7, 2017 Iowa WEA Annual Conference Ottumwa, Iowa
  2. 2. The 5¢ Coca-Cola
  3. 3. 1900: 5¢
  4. 4. 2017: 50¢ in a pack
  5. 5. 2017: $1.00 from a vending machine
  6. 6. But...the 5¢ Coca-Cola Wasn't Really 5¢
  7. 7. Inflation makes an enormous difference
  8. 8. 5¢ in 1917 = $1.04 today
  9. 9. Inflation is unavoidable
  10. 10. Even a little amounts to a lot...over time
  11. 11. Compounding matters
  12. 12. How to get rich on 2%
  13. 13. How Buffett did it
  14. 14. How Buffett did it  S&P 500 grew 9.7% per year (1965 to today)  Berkshire grew 20.8% per year  Difference: 11.1% per year
  15. 15. How Buffett did it  S&P 500 grew 9.7% per year (1965 to today)  Berkshire grew 20.8% per year  Difference: 11.1% per year, but 1,959,878% over 50 years
  16. 16. How it applies to equipment
  17. 17. Some purchases are quick and dirty
  18. 18. Nobody buys a $10,000 pencil
  19. 19. Some up-charges are no-brainers Extending a magazine subscription for $1 a year
  20. 20. But most big purchases require some thought
  21. 21. Considerations and costs
  22. 22. Purchase price
  23. 23. Operational costs  Power/fuel  Consumables  Wearing parts
  24. 24. Warranty period
  25. 25. Maintenance costs  Products  Operator time
  26. 26. Extra benefits Is it good for doing more than one thing?
  27. 27. Substitutions Can something else do the job in a pinch?
  28. 28. Opportunity cost The true cost of anything is what you give up to get it
  29. 29. Accounting principle Ideally, you want to match the cost of something to the time over which you'll use it
  30. 30. A note on financing
  31. 31. We live in a very, very strange era
  32. 32. Inflation: Around 2% a year
  33. 33. 15-year mortgage rates: 3.25%
  34. 34. The real cost of borrowing is 1.25% +3.25% -2.00% ------- +1.25%
  35. 35. Easy to justify borrowing at 1.25% It's not quite "free", but almost
  36. 36. Another note on financing
  37. 37. Great for borrowers, terrible for savers
  38. 38. Inflation: Around 2%
  39. 39. 12-month CD rates: 0.25%
  40. 40. The real return on saving is -1.75% +0.25% -2.00% ------- -1.75%
  41. 41. Your task Since households aren't getting any benefit from "safe" savings, anything you can do to invest wisely for long-term returns in your utility is good for them
  42. 42. Saving for the community
  43. 43. Municipal rates are usually very low "Municipal bonds Ted, I'm talking double-A rating..."
  44. 44. They also rarely invest on their own behalf It's worth considering the rate of return for taxpayers if they kept their own money
  45. 45. Rewarding long-term residents
  46. 46. Rewarding long-term residents Long-term residents benefit most from life-cycle cost management
  47. 47. Who benefits from "cheap"?
  48. 48. Who benefits from "cheap"? "Cheap" benefits transient residents and punishes long-term community members
  49. 49. Two excellent times to borrow long
  50. 50. 1. Low "real" interest rates Interest rate on paper minus inflation rate equals "real" interest rate
  51. 51. 2. High returns on investment
  52. 52. Variables to consider
  53. 53. Replacement period How long will it really last?
  54. 54. Parts Will some need to be replaced often or with great difficulty?
  55. 55. Consumables Giving away the razor and selling the blades
  56. 56. More variables
  57. 57. Out-of-house maintenance Is a service contract being sold by stealth?
  58. 58. Energy It takes a lot of kilowatt-hours to pay for maintenance labor and downtime
  59. 59. Real labor costs Multiply hourly wages by 1.5 to 2 for the true cost
  60. 60. End-of-life-cycle costs
  61. 61. Example: ISU Towers demolition
  62. 62. 39-year life cycle  Constructed in 1966  Demolished in 2005
  63. 63. Demolition cost: $3 million
  64. 64. Demolition cost: $3 million "Both buildings have significant deferred maintenance"
  65. 65. Considerations and costs
  66. 66. Purchase price
  67. 67. Energy costs
  68. 68. Operational costs
  69. 69. Warranty period
  70. 70. Maintenance costs
  71. 71. Major costs
  72. 72. Extra benefits But wait! There's more!
  73. 73. Financing and opportunity costs
  74. 74. Special considerations when buying
  75. 75. Can it be rebuilt to like-new condition? Is there an intermediate step between new and a complete replacement?
  76. 76. Free puppies aren't really free  "Free" when abandoned by a neighbor
  77. 77. Free puppies aren't really free  "Free" when abandoned by a neighbor  Needed $600 in dental care immediately
  78. 78. Free puppies aren't really free  "Free" when abandoned by a neighbor  Needed $600 in dental care immediately  Hidden costs: Walks, housebreaking, new shoes
  79. 79. Example 1: When cheap really isn't
  80. 80. Example 1: When cheap really isn't
  81. 81. Example 2: Ongoing costs will get you
  82. 82. Example 2: Ongoing costs will get you
  83. 83. Example 2: Ongoing costs will get you
  84. 84. How far ahead is too far ahead to buy quality?
  85. 85. Dangerous to assume proper maintenance
  86. 86. Consider whether tech may become obsolete
  87. 87. To recap  Inflation happens  Costs and investments alike can compound  Sticker price is almost never the real life-cycle price  How you structure your costs over time can reward or punish certain types of customers  Financing conditions affect the "right" decision  Even "free" isn't really free  Sometimes $1 spent today is worth $2.50 later
  88. 88. Questions?  Thank you for your attention!  Brian Gongol  DJ Gongol & Associates  515-223-4144  brian@gongol.net  www.gongol.net  Twitter: @djgongol  Facebook.com/djgongol
  89. 89. Credits  Coca-Cola advertising image (public domain):  http://www.loc.gov/pictures/item/2004671509/  CPI calculation:  https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=.05&year1=191701&year2=201701  CPI graph:  https://data.bls.gov/pdq/SurveyOutputServlet  CPI data:  https://fred.stlouisfed.org/graph/?g=dZrT  15-year mortgage data:  https://fred.stlouisfed.org/series/MORTGAGE15US  12-month CD data:  https://fred.stlouisfed.org/series/CD12NRNJ  Municipal bonds:  https://fred.stlouisfed.org/series/WSLB20  Alcatraz closure:  https://www.bop.gov/about/history/alcatraz.jsp  All other pictures and images are original work by Brian Gongol.  Copyright and all other rights reserved. Use by others is prohibited except by explicit written permission.

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