Cost Benefit Analysis

Definition of cost-benefit analysis Cost-benefit analysis is the process of analyzing business decisions. The benefits of a given situation or business related action can be summarized, and then minus the associated costs. Some consultants or analysts have built a model to provide dollar value for intangible assets, For example, the benefits and costs of living in a town will most analysts take into account opportunity cost factors.

1. Introduction

We are KD Logistics Ltd. Company, a global company that provides transcontinental container transportation deliver services to customers.

In the mid-1960s, the presence of shipping containers made things very good and freight has brought a lot of improvements. The transfer of goods became much easier and safer. At present, the shipping containers leading the shipping industry and its impact in land transport is also considerable.

Our clients are all over the region including Australia, Hong Kong, Japan and so on. Among them, AW Walnuts is our long-time partner and customer, this company is a commercial company.

Walnut producers have 1,000 hectares of walnut trees in New South Wales, Australia. In our successful case, our delivery team will deliver the nuts on time according to the requirements of AW Walnuts, so that the goods will pass through the port of Tokyo in time to the retailers in Hong Kong on time. Despite the huge delivery and the distance between regions, we still deliver on time for our customers.

2. Basic analysis

Benefit of proposed
product(s) Evidence

Improved performance
Lower operation
Cost; The improved
Quality; better
Customer service;

Higher speed or more flexibility Technical capabilities of the proposed new system:
• expected productivity;
• reduce waste, such as reducing scrap rate
and less reworking;
• reduce energy consumption.
The information might come from:
• suppliers;
• the experience of other organizations;
• results of a customer survey showing that the aspect of customer service in question is a priority for customers;

• analysis of the technical capabilities of the technology in relation to customer requirements, showing that the stated aspects of customer service are likely to be improved.

Better customer
service Competitors have made considerable investments
Technology, so not doing so will not be able to keep up.
Customer survey demonstrated the improvement
of quality/service
Forecasting will be more effective in attracting and retaining customers than it is now.

Alternative 1
Tangible Benefits Worksheet
KD Logistics Ltd. Company Customer Tracking System Project
Economic feasibility Analysis Year 1 through 5
A. Cost reduction or avoidance US$ 5,500.00
B. Error reduction 1,500.00
C. Increased flexibility 6,500.00
D. Increased speed of activity 10,300.00
E. Improvement in management planning or control 23,000.00
F. Other 0.00
TOTAL tangible benefits US$ 46,800.00

Tangible Benefits Worksheet
KD Logistics Ltd. Company Customer Tracking System Project
Economic feasibility Analysis Year 1 through 5
A. Development costs US$ 8,000.00
B. New hardware 20,000.00
C. New software 7,000.00
D. User training 5,500.00
E. Site preparation 0.00
F. Other 0.00
TOTAL One-time costs US$ 40,500.00

Tangible Benefits Worksheet
KD Logistics Ltd. Company Customer Tracking System Project
Economic feasibility Analysis Year 1 through 5
A. Application software maintenance US$ 25,000.00
B. 20TB Cloud Storage Service 1,600
C. Incremental communications (lines, messages, ..) 600.00
D. New software/hardware leases 0.00
E. Supplies 500.00
F. Other 0.00
TOTAL Recurring costs US$ 27,700.00

Cost-Benefit Analysis
Alternative 1

Cost/Benefit Analysis Year 0 1 2 3 4 5 $Total
Net economic benefits $0.00 $46,800.00 $46,800.00 $46,800.00 $46,800.00 $46,800.00
Discount rate(13%) 1.00 0.88 0.78 0.69 0.61 0.54
PV of benefits $0.00 $41,415.93 $36,651.26 $32,434.75 $28,703.32 $25,401.17

NPV of all benefits $0.00 $41,415.93 $78,067.19 $110,501.94 $139,205.26 $164,606.42 $164,606.42

One-time costs ($40,500.00)

Recurring costs $0.00 ($27,700.00) ($27,700.00) ($27,700.00) ($27,700.00) ($27,700.00)
Discount rate(13%) 1.00 0.88 0.78 0.69 0.61 0.54
PV of recurring costs $0.00 ($24,513.27) ($21,693.16) ($19,197.49) ($16,988.93) ($15,034.45)

NPV of all benefits ($40,500.00) ($65,013.27) ($86,706.44) ($105,903.93) ($122,892.86) ($137,927.31) ($137,927.31)

Overall NPV $26,679.12

Overall Return On Investment=(overall NPV/overall of all costs) 0.19 0.19

Break-even analysis
Yearly NPV cashflow ($40,500.00) $16,902.65 $14,958.10 $13,237.26 $11,714.39 $10,366.71
Overall NPV cashflow ($81,000.00) ($23,597.35) ($8,639.24) $4,598.01 $16,312.40 $26,679.12

Project break-even occurs between years 2 and 3

Break even fraction [($13,237.26-$4,598.01)/ $13,237.26] 0.65
Actual break even occurred at 2.65 year

Alternative 2
Tangible Benefits Worksheet
KD Logistics Ltd. Company Customer Tracking System Project
Economic feasibility Analysis Year 1 through 5
A. Cost reduction or avoidance US$ 4,500.00
B. Error reduction 1,000.00
C. Increased flexibility 5,500.00
D. Increased speed of activity 10,000.00
E. Improvement in management planning or control 20,000.00
F. Other 0.00
TOTAL tangible benefits US$ 41,000.00

Tangible Benefits Worksheet
KD Logistics Ltd. Company Customer Tracking System Project
Economic feasibility Analysis Year 1 through 5
A. Development costs US$ 6,000.00
B. New hardware 10,000.00
C. New software 7,000.00
D. User training 5,500.00
E. Site preparation 0.00
F. Other 0.00
TOTAL One-time costs US$ 28,500.00

Tangible Benefits Worksheet
KD Logistics Ltd. Company Customer Tracking System Project
Economic feasibility Analysis Year 1 through 5
A. Application software maintenance US$ 25,000.00
B. 20TB Cloud Storage Service 1,600
C. Incremental communications (lines, messages, ..) 600.00
D. New software/hardware leases 0.00
E. Supplies 500.00
F. Other 0.00
TOTAL Recurring costs US$ 27,700.00

Cost-Benefit Analysis
Alternative 2

Cost/Benefit Analysis Year 0 1 2 3 4 5 $Total
Net economic benefits $0.00 $41,000.00 $41,000.00 $41,000.00 $41,000.00 $41,000.00
Discount rate(23%) 1.00 0.81 0.66 0.54 0.44 0.36
PV of benefits $0.00 $33,333.33 $27,100.27 $22,032.74 $17,912.80 $14,563.25

NPV of all benefits $0.00 $33,333.33 $60,433.60 $82,466.34 $100,379.14 $114,942.39 $114,942.39

One-time costs ($28,500.00)

Recurring costs $0.00 ($27,700.00) ($27,700.00) ($27,700.00) ($27,700.00) ($27,700.00)
Discount rate(23%) 1.00 0.81 0.66 0.54 0.44 0.36
PV of recurring costs $0.00 ($22,520.33) ($18,309.21) ($14,855.53) ($12,102.06) ($9,839.07)

NPV of all benefits ($28,500.00) ($51,020.33) ($69,329.53) ($84,215.07) ($96,317.13) ($106,156.20) ($106,156.20)

Overall NPV $8,789.19

Overall Return On Investment=(overall NPV/overall of all costs) 0.08 0.08

Break-even analysis
Yearly NPV cashflow ($28,500.00) $10,813.01 $8,791.06 $7,147.21 $5,810.74 $4,724.18
Overall NPV cashflow ($57,000.00) ($17,686.99) ($8,895.93) ($1,748.72) $4,062.01 $8,786.19

Project break-even occurs between years 3 and 4

Break even fraction 1.24
Actual break even occurred at 3.24 year

Summary:

From the above two choices, we can see that alternative 1 is more feasible than alternative 2.
The actual break-even of alternative 1 occurred at 2.65 years, however, the actual break-even of alternative 2 occurred at 3.24 years. It’s relatively late than alternative 1.

The recurring cost discount rate (13%) of alternative 1 is better than the recurring cost discount rate of alternative 2 (23%).

(IRR allows investment in projects of scope and scale. This is the main determinant of whether a project should be implemented.)

After comparing the above NPV formula, our alternative is 1

Because of cost reduction or avoidance and error reduction, our tangible benefits gains were US$7000. We are a long-term strategic partner with AW Walnuts, we have entered into a long-term contract with price-protection provisions with them.

And we found ways to increased flexibility and speed of activity, saved US$16,800 from this benefit. In addition, we have saved US$23,000 on management planning or control improvements, and expect the tangible benefits to be US$46,800 within first five years. There will be no other tangible benefits.

After confirmation, our one-time costs include: (development costs, new hardware, new software, and user training).There is no site preparation cost and other costs.
The total cost of the purchased hardware and software was $US27,000, and the cost of development and user training cost about $US13,500,
in one to five years, we set a one-time cost of $US40,500.

We predict that the Recurring Costs include the following:
application software maintenance,20TB Cloud Storage Service, Incremental communications and supplies.
There will be no other costs.
The combined costs of these three items will be $US27,700 within first five years.

Through the conversion of the NPV formula, we have come up with a positive financial statement in first five years, this fiscal forecast will start to profit in the first year3, year4, and year5.
Moreover, actual break even occurred at 2.65 year.

Project Break-even point chart

Reference:
Cost and Benefits of Advanced Public Transportation Systems at Dart First State
http://sites.udel.edu/dct/files/2013/10/Rpt.-178-Cost-Benefits-of-Advance-Public-Transp.-DART-Final-21yapza.pdf

Human Resources Line of Business Cost Benefit Analysis Report December 31, 2009
https://www.opm.gov/services-for-agencies/hr-line-of-business/cost-benefit-analysis/fy-2009-cost-benefit-analysis-report.pdf

Flexible Rightsizing as a Cost-Effective Alternative to Layoffs A Cost/Benefit Analysis Tool and Guide for Human Resources, Organizational and Business Leaders
https://www.worldatwork.org/aboutus/employee-engagement/pub/Flexible%20Rightsizing%20vs%20Layoffs%20Cost-Benefit%20Analysis%20Tool.pdf

Cost-Benefit and Other Analysis Requirements in the Rulemaking Process Maeve P. Carey, Coordinator Analyst in Government Organization and Management December 9, 2014
https://fas.org/sgp/crs/misc/R41974.pdf

Costs and Benefits in Vocational Education and Training Kathrin Hoeckel
http://www.oecd.org/education/innovation-education/41538706.pdf

Quantity and Price Adjustment in Long-Term Contracts: A Case Study of Petroleum Coke Author(s): Victor P. Goldberg and John R. Erickson Reviewed work(s): Source: Journal of Law and Economics, Vol. 30, No. 2 (Oct., 1987), pp. 369-398
http://www.masonlec.org/site/rte_uploads/files/Goldberg%20and%20Erickson%20class%203%20reference.pdf