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Cost-Benefit Analysis

Cost-Benefit Analysis. Rick Manhas. Introduction.

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Cost-Benefit Analysis

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  1. Cost-Benefit Analysis Rick Manhas

  2. Introduction • Cost-Benefit Analysis is about “analysis that is done to determine how well, or how poorly, a planned action will turn out. …It is most commonly done on financial questions. Since the cost benefit analysis relies on the addition of positive factors and the subtraction of negative ones to determine a net result, it is also known as running the numbers.” The chosen tool or strategic orientation of cost benefit analysis and how it is linked to walk ability around campus, can be understood in how many students attend the Malaspina. If planning is done properly, there will be less line-ups, in everything from the restaurant, bookstore, and when paying tuition fees. When studying cost-benefit analysis it will usually require comparing cost sheet to some other method of calculating cost and trying to arrive at the most feasible method. In this process policy and decision makers better understand the role which cost benefit analysis can play in helping policy and decision makers better understand the role which fulfills the decision making. There is no standard way of doing cost benefit analysis, it is practiced in every field, the examples I will use are in real estate for projects explaining the cost approach, in accounting using cash flow and outflows and economic age/life method.

  3. In real estate one can use the cost approach to arrive at a value for a building. In this the cost is amount it costs to bring something to existence. Illustration of Steps in Cost Approach • 1. Estimated Land Value 75,000 • 2. Estimated reproduction cost 120,000 • 3. Estimate accrued depreciation • - and subtract from the R.C.N 15,000 • 4. Depreciated building cost 105,000 • 5. Add value of ancillary • buildings and site improvements 5,000 • 6. Depreciated value • of buildings and improvements 110,000 • 7. Estimated value of fee simple interest 185,000 • 8. Unfavorable mortgage creates • a $5,000 loss for purchaser -5,000 • Estimated value of fee simple subject to mortgage 180,000”

  4. Next there is another method of analyzing cost benefit analysis. This is from cash flows from financing activities. These include “cash inflows and cash outflows” From this one can see where the expenses occur. By analyzing these carefully one can cut back on unnecessary expenditures. • Cash FlowsCash Outflows • Proceeds from selling productive assets Payments to purchase property, plant • (for example land, buildings, equipment, and equipment or other productive • Natural resources, and intangible assets) assets (excluding merchandise inventory) • Proceeds from selling investments Payment to acquire equity securities of • In the equity securities of other companies other companies, except cash equivalents. • Proceeds from selling investments in the Payments to acquire debt securities of other • debt securities of other entities except cash entities, except cash equivalents. • Equivalents. • Proceeds from collecting the principal amount Payments in the form of loans made to • of loans. other parties.

  5. Another possible approach would be in economics using the “Economic Age-Life Method” In this: “Effective Age/Total Economic Life x Reproduction = Accrued Depreciation.” The example one can use in this would be taking a component and looking at the replacement cost new then the effective age, by taking the physical life. In the end one multiplies the ratio or percentage to arrive at the depreciation. • Effective Physical Ratio • Component R.C.N. Age Age % Depreciation • -------------- ------------- ------------ ---------- ------- ----------------- • Flooring $10,400 6 years 12 years 50% $5,200 • Roof Cover 2,250 12 years 20 years 60% 1,350 • Kitchen Cupboards 12,000 15 years 20 years 75% 9,000 • Plumbing Fixtures 4,000 12 years 22 years 54% 2,160 • Windows and Doors 15,800 6 years 20 years 30% 4,740 • Electrical Fixtures 3,150 12 years 15 years 80% 2,520 • Furnace $4,000 12 years 25 years 48% $1,920 • ---------- ---------- • Total RCN $51,600 • Total Physical depreciation, short lived components $26,890

  6. Cost benefit analysis or economic tool to aid in decision making, on topic of walk-ability around campus can be done as follows. First see how more people walking on campus could improve or worsen the situation. Common sense would indicate that more people walking would certainly not be negative in any way. • Benefits Liabilities • Less traffic accidents (less greenhouse gasoline) Longer to get to class • Better health for individuals walking Overuse of walkways • More services used at Malaspina Vandalism • (i.e. restaurant, bookstore) Unwanted trails, extra landscaping • Greening of areas where urban transport would have been More cleaning • More trails, i.e. there are several shortcuts in grass • Area is usually considered safer if more people are using walkways • Challenges at Malaspina • Malaspina is located on a slope where bicycles are a challenge to ride, wheelchair accessibility is always a challenge on areas that are located on a slope. Roller-skates or skateboards which could be used cannot be used because of steps.

  7. In conclusion cost-benefit analysis is an attempt to see how costs can be minimized by doing proper and complete analysis. There are several methods which include appraisals, accounting, economic age/life method or any of several types of feasibility studies which would include possible surveys, or questionnaires to find if there is demand or not and then taking positive and negative cash flow scenarios to see what will or will not work.

  8. Bibliography 1. F. John Reh, Cost Benefit Analysis. Your guide to management. About.com:Management, http://management.about.com/cs/money/a/CostBenefit.htm 2. A.M. Barber, Basics of Real Estate Appraising. Appraisal Institute of Canada, Winnipeg. 1995. 3. Kermit Larson, et al. Fundamental Accounting Principles. Times Mirror Professional Publishing Ltd. 4. Simon Breines and William Dean, The Pedestrian Revolution-Streets Without Cars. A Division of Random House, New York. 5. Thomas Klein, Assessing Distributive Justice in Marketing: A Benefit Cost Approach. Journal of macromarketing, sage publications. 28, no. 1 (2008): 33-43. ISSN: 0276-1467.

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