Cost Benefits Analysis Example - Free Download | Page 3
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M M U
C o s t B e n e f i t A n a l y s i s t o o l k i t ( v 2 )
Page
3
academic)
•
Reduce wages!
• Eliminate waste/improve work flow
• Improve attendance
Capital Costs
Land,
Facilities,
Construction
•
Reduce square footage requirements
• Buy cheaper real estate
• Reduce equipment/build out costs
• Reduce construction timeframes
2.2 Types of information:
There are various sources of information and you need to think about the balance between the
quality of the information (primary is usually better) versus the cost of getting it (secondary is usually
cheaper).
Primary
Secondary
Researched information (takes more time &
resource)
Existing information within then organisation
Internal:
• end-to-end measures of service;
• employee feedback;
• pilots/simulations.
Internal:
• costing information;
• internal reports;
• process & activity measures.
External:
• customer views;
• information about competitors;
• expert opinion.
External:
• market research reports;
• trade press & mass media;
• word of mouth/networks.
3. Some cost benefit analysis methods:
In the examples below, figures are presented without reference to net or gross amounts. In reality
you should always state both net and gross – see section 1.2
3.1 Payback:
This is literally the amount of time required for the cash inflows from a capital investment project to
equal the cash outflows.
Payback period = Initial payment / Annual cash inflow
So, if £4 million is invested with the aim of earning £500 000 per year (net cash earnings), the
payback period is calculated thus:
P = £4,000,000 / £500,000 = 8 years
Payback with uneven cash flows:
In the real world, investment projects by business organisations don't yield even cash flows. For
example (with an initial investment in year 0 of £4,000,000):
Year
Cash
flow
(£ 000)
Cumulative cash flow
(£ 000)
0
(4000)
(4000)
1
750
(3250)
2
750
(2500)
3
900
(1600)
