Sources of Data & Calculation Process for Benefit/Cost

A benefit/cost analysis may be as simple as a ratio quickly scribbled on the back of an envelope; it may be as complicated as a mathematical model built on a mainframe computer which no single person understands in its entirety. The model presented here is a fairly simple one, but it includes most of the elements to permit the analyst to expand it into as confusing and complex a model as one could want. The one element which has been excluded is discounting; more about that later.

The data for a benefit/cost analysis are entirely user-generated and are usually unique to each project. The analyst will need to construct the following tables (the dots [...] indicate user-supplied data):

                EVALUATION MEASURES

                    Msr.1  Msr.2   Msr.3   Msr.4

          Project 1 .....  .....   .....   .....

PROGRAM   Project 2 .....  .....   .....   .....

ALTERNATE Project 3 .....  .....   .....   .....

          Project 4 .....  .....   .....   .....

Discount Rate      . . .

Number of Years     . . .

                     TABLE OF IMPACTS

      WGTS FOR EVAL MSRS           COSTS FOR PROGRAMS

         MSR      WGT               PROGRAM    COST

        Msr. 1   .....             Project 1     .....

        Msr. 2   .....             Project 2     .....

        Msr. 3   .....             Project 3     .....

        Msr. 4   .....             Project 4     .....

TOTAL BUDGET = .....

The terms used in these tables are:

program alternatives, or the projects to be compared
discount rate, expressed as a decimal fraction (i.e., a 10% discount rate should be entered as “0.1”). If discounting is not being considered, enter “0”.
number of years, until benefits or costs are realized. If discounting is not used, enter “0”.
weights for evaluation measures or the relative importance of each of the objectives to be achieved by the program. If all objectives are equal, assign a weight of "1" to each (a blank or a zero in this table would result in an error from the program).
table of impacts, or the distribution of benefits among the evaluation measures for each program alternative. The benefits are calculated on a unit basis--the table does not present the total impact of each program, but the benefit from one project unit for each program. If the program is indivisible, then the unit impact and the total impact will be identical.
costs for programs, or the unit cost for each program alternative.
total budget, or the amount of money to be made available. The template uses this information to calculate automatically four measures:

              SUMMARY OF COSTS AND BENEFITS

               WEIGHTED  NO. OF   WEIGHTED  EFFECT/

    PROGRAM      UNIT   UNITS IN  PROGRAM    COST

   ALTERNATE    EFFECT   BUDGET    EFFECT   RATIO

        1         0      xxxx       xxxx     xxxx

        2         0      xxxx       xxxx     xxxx

        3         0      xxxx       xxxx     xxxx

        4         0      xxxx       xxxx     xxxx

weighted unit effect: This is the impact, or benefit from each project for each of the evaluation measures, multiplied by the "weight," or importance of each evaluation measure. This provides an estimate of the relative impact of each project.
number of units in budget: This is the calculation of how many units of each project can be afforded within the limits of the total budget.
weighted program effectiveness: This is the product of the weighted effectiveness per unit and the number of units within the budget.
effectiveness/cost ratio: This is an index of the relative efficiency of each program. It is the ratio discussed earlier.

This template includes a simple procedure for discounting the costs and impacts of a program. It assumes that all costs are incurred at some definite point, and all benefits are incurred at some definite point. A more complicated spreadsheet could be designed to consider a string of costs or benefits spread over time, each point in the string discounted to its present value and those values added together to arrive at the final ratio.

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