Handout Group 6
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Group Facilities Planning 6
Cost Benefit Analysis Definition and Purpose A technique that can be used to evaluate government projects and programs. It encompasses an appraisal of a policy based on the costs and benefits of the project. A CBA should be performed for each investment alternative to enable the evaluation and comparison of alternatives. Measurement in the Cost Benefit Analysis 1. Net Present Value The net present value of a project is the sum of the present value of each cost and other effects of a project. A positive NPV indicates that benefits outweigh the costs of a project. 2. Benefit Cost Ratio The ratio obtained by dividing of the sum of the present value of the benefits by the sum of the present value of the costs. A BCR greater than 1 indicates that the benefits outweigh the cost of a project. 3. Net Present Value per unit of Investment the net present value divided by the present value of a project’s capital cost. This ratio provides an indication of the effectiveness of a given level of investment. Process 1. Determine/Define Objectives The CBA should include a problem definition, pertinent background information and a list of investment objectives that identify how the system will improve the work process and support the mission. 2. Document Current Process The current process should be thoroughly documented and address the areas of customer satisfaction and system architecture. 3. Estimate Future Requirements Two items to consider are lifecycle time and lifecycle demands. 4. Collect Cost Data Data can be collected, from several sources, to estimate the costs of each investment alternative. 5. Choose at Least Three Alternatives A CBA should present at least three viable alternatives. “Do nothing” or “Continue current operations” should not be considered as an alternative. Each viable technical approach should be included as an alternative. 6. Document CBA Assumptions It is important to document all assumptions and, if possible, justify them on the basis of prior experiences or actual data. 7. Estimate Costs Many factors should be considered during the process of estimating costs for alternatives. Full lifecycle costs for each competing alternative should be included, and certain factors should be addressed. 8. Estimate Benefits The steps to estimate benefits include: defining benefits, identifying benefits, establishing measurement criteria, classifying benefits, quantifying intangible benefits, and estimating tangible benefits.
Group Facilities Planning 6
9. Discount Costs and Benefits After costs and benefits for each system lifecycle year have been identified, they are converted into a common measurement unit by discounting future dollar values and transforming future benefits and costs to their “present value.” 10. Evaluate Alternatives Many benefits cannot be quantified in dollar terms. As a result, evaluating alternatives cannot always be done using present values, but valid evaluations can be made using a combination of dollar values and quantified relative values (values that are numeric, but do not represent dollar values). 11. Perform Sensitivity Analysis Sensitivity analysis tests the sensitivity of input parameters and the reliability of the CBA result. Sensitivity analysis should assure reviewers the CBA provides a sound basis for decisions. 12. Compare Investments Even if the CBA shows that benefits will outweigh costs, using Payback Period and Return on Investment (ROI) analysis help demonstrate an investment is a better utilization of funds than other proposed investments.
Cost Effectiveness Analysis (CEA) Introduction Cost-effectiveness analysis refers to the consideration of decision alternatives in which both their costs and consequences are taken into account in a systematic way. It is a decision oriented tool, in that it is designed to ascertain which means of attaining particular educational goals are most efficient. For example, there are many alternative approaches for pursuing such goals as raising reading or mathematics achievements. Developed in the military, CEA was first applied to health care in the mid-1960s and was introduced with enthusiasm to clinicians by Weinstein and Stason in 1977. Basic of Cost Effectiveness Analysis Cost-effectiveness analysis is an alternative to benefit-cost analysis that relates the cost of a given alternative to specific measures of program objectives. A costeffectiveness analysis helps to compare costs to units of program objectives and may be the first step in a benefit-cost analysis if the analyst then decides to attempt to place a dollar value on the benefits. Unlike benefit-cost analysis, cost-effectiveness analysis does not produce a “net benefit” number, with benefits exceeding costs or costs exceeding benefits. However, a cost-effectiveness analysis can determine that a program which costs $1 million produces ten units of outcome x, twelve units of outcome y, and twenty units of outcome z. Or, if the units are alike, it can determine the cost per unit of outcome. An example of this method of analysis using a hypothetical dropout prevention program is presented in Box1 below.
Group Facilities Planning 6 Box1: Hypothetical Cost-Effectiveness Results for Dropout Prevention Strategies The cost-effectiveness of each dropout prevention strategy is determined by dividing the cost for each strategy by its effectiveness (e.g., the percentage increase in the number of students graduating). The result is the cost for each percent increase in the number of students graduating. Strategy Mentoring After-School Sports
Costs $80,000
Effectiveness 10
C/E Ratio $8,000
$65,000
5
$13,000
Deciding Between Cost-Effectiveness Analysis and Benefit-Cost Analysis Those faced with deciding between the two types of analysis may find it helpful to keep three basic questions in mind: 1. How will you use the results? Benefit-cost analysis enables you to compare strategies that do not have the same outcomes, or to compare strategies across different areas of public expenditure (e.g., health, welfare, justice). Cost-effectiveness analysis is useful for comparing strategies that are trying to achieve the same objective (e.g., increased graduation rates). 2. What resources do you have? Benefit-cost analyses typically require more resources, because they take more time for analysis and involve significant methodological expertise (often in economics), such as the capacity for determining the discounted present value of a stream of benefits and costs. 3. How difficult are costs and benefits to value? While you may want to have as much information as possible on both benefits and costs, you must weigh the value of the increased accuracy gained from the accumulation of new data against the costs associated with the data collection. Thus, any analysis should begin by assimilating existing data to determine whether it is sufficient. Conclusions The more intangible the benefit (for example saved wilderness), the more likely it is that a cost-effectiveness analysis will be of greater use to decision makers. This type of analysis can help them assess whether a cost is justifiable, when compared with other uses of the same funds. UTILITY ANALYSIS UTILITY: The satisfaction of wants and needs obtained from the use or consumption of goods and services. The terms utility and satisfaction are, for the most part, used interchangeably in economics. The concept of utility is integral to utility analysis, consumer demand theory, and the microeconomic analysis of consumer behavior and market demand.
Group Facilities Planning 6 Utility is another term for the satisfaction of wants and needs obtained from the consumption of goods. Two other economic terms that are also frequently used to capture this notion are welfare and well-being. Whichever term is used, the underlying concept is the same: Utility is the extent to which unlimited wants and needs are fulfilled using the goods and services produced from society's limited resources. The utility concept is an integral part of consumer demand theory and the in-depth study of market demand, the demand curve, and the law of demand. UTILITY ANALYSIS: A subset of consumer demand theory that analysis consumer behavior and market demand using total utility and marginal utility. The key principle of utility analysis is the law of diminishing marginal utility, which offers an explanation for the law of demand and the negative slope of the demand curve. Utility analysis, a subset of consumer demand theory, provides insight into an understanding of market demand and forms a cornerstone of modern microeconomics. In particular, this analysis investigates consumer behavior, especially market purchases, is based on the satisfaction of wants and needs (that is, utility) generated from the consumption of a good. Utility analysis is primarily taught in introductory courses. A more sophisticated version of consumer demand theory relies on the analysis of indifference curves and is more commonly found at the intermediate course level and above.
Balanced Scorecard Balanced Scorecard is a new approach to strategic management was developed by Drs. Robert Kaplan and David Norton. It recognizes some of the weaknesses and vagueness of previous management approaches. Balanced scorecard approach provides a clear prescription as to what companies should measure in order to balance the financial perspective. Kaplan and Norton found that companies are using the scorecard to: • Clarify and update strategy • Communicate strategy throughout the company • Align unit and individual goals with strategy • Link strategic objectives to long term targets and annual budgets • Identify and align strategic initiatives • Conduct periodic performance reviews to learn about and improve strategy
Group Facilities Planning 6
Four fundamental perspectives Financial perspective How do we perform according to our shareholders? Customer perspective How do our customer see us?
Vision and Strategy
Business proses perspective What must we excell at?
Learning and growth perspective Can we continue to improve & create value?
Advantages of applying balanced scorecard: • Helps align key performance measures • Provides management with a comprehensive picture of business goals and strategies • Transforms the strategic plan from an attractive but passive document into the marching orders for the organization on a daily basis • Enables executives to truly execute their strategies Disadvantages and problems of using balanced scorecard : • Lack of time for the decision makers to focus on strategy • Difficult in creating well defined metrics and connecting them to deliverables • Difficult and time consuming to implement a comprehensive balanced scorecard system in a large organization • Require sustained top level support and commitment to ramp up and put the system in place I. II. III. IV.
(Kusumantoro,Heribertus Rudi-Nr.2217457) (Susilo,Martinus – Nr. 2221237) (Putra, Adhi Tharsia Nr.2217858) (Gunawan,Marantika Nr.2221228)
Cost Benefit Analysis Definition and Purpose A technique that can be used to evaluate government projects and programs. It encompasses an appraisal of a policy based on the costs and benefits of the project. A CBA should be performed for each investment alternative to enable the evaluation and comparison of alternatives. Measurement in the Cost Benefit Analysis 1. Net Present Value The net present value of a project is the sum of the present value of each cost and other effects of a project. A positive NPV indicates that benefits outweigh the costs of a project. 2. Benefit Cost Ratio The ratio obtained by dividing of the sum of the present value of the benefits by the sum of the present value of the costs. A BCR greater than 1 indicates that the benefits outweigh the cost of a project. 3. Net Present Value per unit of Investment the net present value divided by the present value of a project’s capital cost. This ratio provides an indication of the effectiveness of a given level of investment. Process 1. Determine/Define Objectives The CBA should include a problem definition, pertinent background information and a list of investment objectives that identify how the system will improve the work process and support the mission. 2. Document Current Process The current process should be thoroughly documented and address the areas of customer satisfaction and system architecture. 3. Estimate Future Requirements Two items to consider are lifecycle time and lifecycle demands. 4. Collect Cost Data Data can be collected, from several sources, to estimate the costs of each investment alternative. 5. Choose at Least Three Alternatives A CBA should present at least three viable alternatives. “Do nothing” or “Continue current operations” should not be considered as an alternative. Each viable technical approach should be included as an alternative. 6. Document CBA Assumptions It is important to document all assumptions and, if possible, justify them on the basis of prior experiences or actual data. 7. Estimate Costs Many factors should be considered during the process of estimating costs for alternatives. Full lifecycle costs for each competing alternative should be included, and certain factors should be addressed. 8. Estimate Benefits The steps to estimate benefits include: defining benefits, identifying benefits, establishing measurement criteria, classifying benefits, quantifying intangible benefits, and estimating tangible benefits.
Group Facilities Planning 6
9. Discount Costs and Benefits After costs and benefits for each system lifecycle year have been identified, they are converted into a common measurement unit by discounting future dollar values and transforming future benefits and costs to their “present value.” 10. Evaluate Alternatives Many benefits cannot be quantified in dollar terms. As a result, evaluating alternatives cannot always be done using present values, but valid evaluations can be made using a combination of dollar values and quantified relative values (values that are numeric, but do not represent dollar values). 11. Perform Sensitivity Analysis Sensitivity analysis tests the sensitivity of input parameters and the reliability of the CBA result. Sensitivity analysis should assure reviewers the CBA provides a sound basis for decisions. 12. Compare Investments Even if the CBA shows that benefits will outweigh costs, using Payback Period and Return on Investment (ROI) analysis help demonstrate an investment is a better utilization of funds than other proposed investments.
Cost Effectiveness Analysis (CEA) Introduction Cost-effectiveness analysis refers to the consideration of decision alternatives in which both their costs and consequences are taken into account in a systematic way. It is a decision oriented tool, in that it is designed to ascertain which means of attaining particular educational goals are most efficient. For example, there are many alternative approaches for pursuing such goals as raising reading or mathematics achievements. Developed in the military, CEA was first applied to health care in the mid-1960s and was introduced with enthusiasm to clinicians by Weinstein and Stason in 1977. Basic of Cost Effectiveness Analysis Cost-effectiveness analysis is an alternative to benefit-cost analysis that relates the cost of a given alternative to specific measures of program objectives. A costeffectiveness analysis helps to compare costs to units of program objectives and may be the first step in a benefit-cost analysis if the analyst then decides to attempt to place a dollar value on the benefits. Unlike benefit-cost analysis, cost-effectiveness analysis does not produce a “net benefit” number, with benefits exceeding costs or costs exceeding benefits. However, a cost-effectiveness analysis can determine that a program which costs $1 million produces ten units of outcome x, twelve units of outcome y, and twenty units of outcome z. Or, if the units are alike, it can determine the cost per unit of outcome. An example of this method of analysis using a hypothetical dropout prevention program is presented in Box1 below.
Group Facilities Planning 6 Box1: Hypothetical Cost-Effectiveness Results for Dropout Prevention Strategies The cost-effectiveness of each dropout prevention strategy is determined by dividing the cost for each strategy by its effectiveness (e.g., the percentage increase in the number of students graduating). The result is the cost for each percent increase in the number of students graduating. Strategy Mentoring After-School Sports
Costs $80,000
Effectiveness 10
C/E Ratio $8,000
$65,000
5
$13,000
Deciding Between Cost-Effectiveness Analysis and Benefit-Cost Analysis Those faced with deciding between the two types of analysis may find it helpful to keep three basic questions in mind: 1. How will you use the results? Benefit-cost analysis enables you to compare strategies that do not have the same outcomes, or to compare strategies across different areas of public expenditure (e.g., health, welfare, justice). Cost-effectiveness analysis is useful for comparing strategies that are trying to achieve the same objective (e.g., increased graduation rates). 2. What resources do you have? Benefit-cost analyses typically require more resources, because they take more time for analysis and involve significant methodological expertise (often in economics), such as the capacity for determining the discounted present value of a stream of benefits and costs. 3. How difficult are costs and benefits to value? While you may want to have as much information as possible on both benefits and costs, you must weigh the value of the increased accuracy gained from the accumulation of new data against the costs associated with the data collection. Thus, any analysis should begin by assimilating existing data to determine whether it is sufficient. Conclusions The more intangible the benefit (for example saved wilderness), the more likely it is that a cost-effectiveness analysis will be of greater use to decision makers. This type of analysis can help them assess whether a cost is justifiable, when compared with other uses of the same funds. UTILITY ANALYSIS UTILITY: The satisfaction of wants and needs obtained from the use or consumption of goods and services. The terms utility and satisfaction are, for the most part, used interchangeably in economics. The concept of utility is integral to utility analysis, consumer demand theory, and the microeconomic analysis of consumer behavior and market demand.
Group Facilities Planning 6 Utility is another term for the satisfaction of wants and needs obtained from the consumption of goods. Two other economic terms that are also frequently used to capture this notion are welfare and well-being. Whichever term is used, the underlying concept is the same: Utility is the extent to which unlimited wants and needs are fulfilled using the goods and services produced from society's limited resources. The utility concept is an integral part of consumer demand theory and the in-depth study of market demand, the demand curve, and the law of demand. UTILITY ANALYSIS: A subset of consumer demand theory that analysis consumer behavior and market demand using total utility and marginal utility. The key principle of utility analysis is the law of diminishing marginal utility, which offers an explanation for the law of demand and the negative slope of the demand curve. Utility analysis, a subset of consumer demand theory, provides insight into an understanding of market demand and forms a cornerstone of modern microeconomics. In particular, this analysis investigates consumer behavior, especially market purchases, is based on the satisfaction of wants and needs (that is, utility) generated from the consumption of a good. Utility analysis is primarily taught in introductory courses. A more sophisticated version of consumer demand theory relies on the analysis of indifference curves and is more commonly found at the intermediate course level and above.
Balanced Scorecard Balanced Scorecard is a new approach to strategic management was developed by Drs. Robert Kaplan and David Norton. It recognizes some of the weaknesses and vagueness of previous management approaches. Balanced scorecard approach provides a clear prescription as to what companies should measure in order to balance the financial perspective. Kaplan and Norton found that companies are using the scorecard to: • Clarify and update strategy • Communicate strategy throughout the company • Align unit and individual goals with strategy • Link strategic objectives to long term targets and annual budgets • Identify and align strategic initiatives • Conduct periodic performance reviews to learn about and improve strategy
Group Facilities Planning 6
Four fundamental perspectives Financial perspective How do we perform according to our shareholders? Customer perspective How do our customer see us?
Vision and Strategy
Business proses perspective What must we excell at?
Learning and growth perspective Can we continue to improve & create value?
Advantages of applying balanced scorecard: • Helps align key performance measures • Provides management with a comprehensive picture of business goals and strategies • Transforms the strategic plan from an attractive but passive document into the marching orders for the organization on a daily basis • Enables executives to truly execute their strategies Disadvantages and problems of using balanced scorecard : • Lack of time for the decision makers to focus on strategy • Difficult in creating well defined metrics and connecting them to deliverables • Difficult and time consuming to implement a comprehensive balanced scorecard system in a large organization • Require sustained top level support and commitment to ramp up and put the system in place I. II. III. IV.
(Kusumantoro,Heribertus Rudi-Nr.2217457) (Susilo,Martinus – Nr. 2221237) (Putra, Adhi Tharsia Nr.2217858) (Gunawan,Marantika Nr.2221228)
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