Session 18. Introduction to cost benefit analysis (cba)

 Total time: 1 hour Objectives: * To review and discuss the basic principles of cost benefit analysis (CBA) * To determine the cost benefit of an appropriate technology * To discuss how cost benefit analysis can be used in community development work Resources: * Attachment V-18-A, "An Outline of Cost Benefit Analysis" * Attachment V-78-8, "Sample Cost Benefit Analysis of Solar Cooler" Materials: Newsprint and felt-tip pens, pencils, paper

Procedures:

Step 1. (5 minutes)
Review the objectives and outline the session activities.

Step 2. (10 minutes)
Distribute, review and explain Attachments V-18-A and V-18-B.

 Trainer Notes * Carefully explain each major point on Attachment V-18A, referring participants to Attachment V-18-B for examples. * Point out that the figures on Attachment V-18-B are intended only for practice purposes and not meant to reflect the actual costs.

Step 3. (30 minutes)
Have the participants solve two or three sample cost benefit problems.

 Trainer Notes * Ask that those participants who understand the formulas help those who are having difficulty. * Encourage construction groups to prepare a cost benefit analysis as part of their final presentations.

Step 4. (15 minutes)
Conclude by discussing how cost benefit analysis can be used in community development work.

 Trainer Notes Stimulate discussion by asking the following questions: * What are the strengths ant weaknesses of CBA?* To whom is CBA important?* What information can CBA provide? Not provide? How would you explain CBA principles to people with little or no formal education?* Can the formulas be simplified?

AN OUTLINE OF COST BENEFIT ANALYSIS

1. Opportunity Cost (fill in a definition in your own words)

2. Present Value (PV)

Problem: What is the present value (PV) of \$100.00 of total benefits received a year from now?

If you receive an interest rate of S10% per year, then

PV (Present Value) + (PV x 10%) (Interest)= \$100 or
PV (1.10) = \$100 so
PV = \$ 100/1.10 = \$90

3. PV of a Project

In words: The present value equals total benefits minus total costs divided by one plus the interest rate.

Equation: ; r = interest rate

For several years: ; l = year of cost+ benefits

4. Steps for Determining PV of a Project

A. List all costs ant benefits (labor, materials, maintenance).
B. Adjust costs and benefits involving foreign exchange upwards by the foreign exchange multiplier.
C. Add up total benefits (B) and total costs (C).
D. Use equation to calculate PV or Net PV.
E. Compare options and choose project with highest PV (for 1 year) or Net PV (over many years).

SAMPLE COST BENEFIT ANALYSIS OF A SOLAR COOLER (Over one year)

 COSTS Equipment 1. Lid: Paint \$.05 Straw .00 Polyethylene (12 ft.²), import/.60 x 1.5* .90 Tape, import .05 x 1.5* .08 Subtotal 1.03 2. Innards: Base support .50 Cannister 1.00 Metal restraints .25 Wood restraints .00 Various plugs .70 Subtotal 2.45 3. Outer Container import, \$10 x 1.5* 15.00 Total Equipment 18.48 Labor 3 workers x 10 hours @ 50¢ per hour 15.00 Annual Maintenance 1. New paint .05 2. 10 minute adjustments per day x 50 ¢/hour x 365 days 30.40 Total Annual Maintenance 30.45 TOTAL COSTS \$63.93
 BENEFITS Food Loss Avoided 10¢ saved/day x 365 days \$36.50 Improved Health 5 fewer illnesses/year x(\$5 savings in medical costs + \$28 in wages no longer lost) 165.00 Value of Cool Drinks Cost of cool beer=\$.50 Cost of warm beer=\$.25 (.50-.25)x365 days 91.00 Additional Benefits Value of time saved by cooking leftovers? Increased straw? TOTAL BENEFITS \$292.50

Interest rate = 10%
Wage rate = \$4/day
* Foreign exchange multiplier =1.5