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Environmental economics

Conducting a Simple Cost Benefit Analysis Example for a project

In this article, you will find every ins and outs of cost benefit analysis with a project of nursery. By reading this article, you will know about Conducting a Cost-Benefit Analysis for an Assumed Project to Decide Whether the Project is Profitable or Not?

What is a cost benefit analysis:

A cost benefit analysis is nothing but process of comparing costs and benefits of a project. A cost benefit analysis determines whether a project makes sense from a business perspective or not. Cost-benefit analysis process includes tallying up all costs of an environmental project or decision and subtracting that cost from the total projected benefits gets from the environmental project or decision.
If the projected benefits more than the costs, one can claim that the decision is a good one to make and the project can be run. On the other hand, the costs are more than the benefits, then a company may want to rethink the decision or project will be run or not. To conduct a simple cost benefit analysis establishment of a framework, identifications of cost and benefits, total value from the comparison of cost and benefits etc. are analyzed in details. In this study I have considered an imaginary plant nursery project of 10 years duration for which cost-benefit analysis has been done. The nursery will produce seedlings as well as sell nursery inputs.

Simple cost benefit analysis formula:

The following formulae were used to calculate the discounted values of costs and benefits:

Total discounted cost = C0+ C1/(1+i)+ C2/(1+i)2+…..+C5/(1+i)5

Total discounted benefits = B0+ B1/(1+i)+ B2/(1+i)2+…..+ B5/(1+i)5

Where C0, C1, …. C5 are costs incurred in year 0, 1, …., 5

and B0, B1, …. B7 are benefits received in year 0,1,…, 7 at a discount rate of i percent.

List of Probable Cost Sectors for a simple cost benefit analysis project:

Production Cost for a simple cost benefit analysis project:

  • Land Lease
  • Seed
  • Seedling
  • Polythene
  • Fertilizer and Pesticide
  • Net and Bamboo
  • Carriage inward (transportation cost for carrying materials from vendors)
  • Labor  Pump, water tank and associated water supply network
  • Electricity Bill
  • Stock Loss
  • Provision (loss due to seedling mortality)
  • Pot and Plastic Tray
  • Soil
  • Others

Operational Cost for simple cost benefit analysis project:

  • Salary and Benefits
  • Stationeries, Supplies and Utilities
  • General Expenses and Maintenance

 

List of Probable Benefits from simple cost benefit analysis project:

  • Fruit Seedling
  • Forest Seedling
  • Medicinal Seedling
  • Spices Seedling
  • Seasonal Seedling
  • Ornamental Seedling
  • Revenue From Selling Nursery Inputs (such as earthen pot, spray machine of different sizes, secateurs, pruning knife, soil and fertilizer etc. for home and commercial gardening)

Production Cost for  a simple cost benefit analysis of a project (establishing the plant nursery)

Year Land Lease Seed Seedlings Polythene Fertilizer and Pesticides Net & Bamboo Carriage inward Labour Pump and water network Electricity Bill Stock Loss Provision Plot & Plastic Tray Soil Others
1 50000 5000 100000 10000 50000 50000 10000 150000 80000 3600 10000 50000 10000 5000
2 50000 5000 110000 10000 50000 5000 7000 150000 0 3600 8000 50000 8000 5000
3 50000 5500 80000 9500 60000 5000 6000 150000 0 3600 8000 60000 7000 5000
4 55000 6000 65000 9500 60000 8000 6000 160000 0 4500 7000 60000 6000 5000
5 55000 7000 40000 9000 70000 6000 5000 160000 0 4500 6000 60000 4000 5000
6 58000 7000 30000 8500 70000 5000 5000 170000 0 4500 6000 62000 4000 5000
7 58000 7500 30000 8500 70000 5000 5000 170000 0 5000 5000 64000 4000 5000
8 60000 7500 30000 8000 70000 5000 4000 170000 0 5000 5000 63000 4000 5000
9 60000 8000 30000 8000 70000 5000 4000 180000 0 5200 5000 65000 4000 5000
10 60000 8000 30000 7500 70000 80000 4000 180000 0 5500 45000 65000 4000 5000

 

Operational Cost for a simple cost benefit analysis of a project (establishing the plant nursery)

 

Year Salary & Benefits Stationeries, Supplies & Utilities General Expenses & Maintenance Advertisement
1 100000 30000 70000 8000
2 100000 30000 70000 5000
3 110000 30000 70000 3000
4 110000 30000 70000 0
5 120000 30000 70000 0
6 120000 30000 70000 0
7 120000 30000 70000 0
8 140000 30000 70000 0
9 140000 30000 70000 0
10 150000 30000 70000 0

 

Benefits from a simple cost benefit analysis of a project (establishing the plant nursery) 

Probable benefits from nursury Fruits seedling Forest seedling Medicinal seedling Spices Seedling Seasonal flowers Ornamental plants Nursery inputs
1 180000 100000 80000 100000 90000 50000 90000
2 180000 100000 100000 100000 90000 50000 80000
3 190000 140000 120000 110000 80000 110000 80000
4 190000 150000 140000 140000 100000 110000 100000
5 190000 170000 150000 150000 110000 130000 120000
6 190000 190000 170000 160000 120000 150000 130000
7 200000 250000 180000 160000 130000 150000 150000
8 200000 300000 190000 170000 130000 160000 180000
9 250000 350000 190000 190000 150000 180000 200000
10 250000 380000 200000 190000 160000 190000 220000

 

Calculation for a simple Cost Benefit analysis project:

Calculating Discounted Cost and Discounted Benefits

Year Total Benefits Discounted Benefit (Tk.) R=9% Total Discounted Cost (Tk.) R=9%
1 690000 627900 791600 720356
2 700000 637000 666600 606606
3 830000 755300 662600 602966
4 930000 846300 657000 597870
5 1020000 928200 646500 588315
6 1110000 1010100 647000 588770
7 1220000 1110200 649000 590590
8 1330000 1210300 666500 606515
9 1510000 1374100 679200 618072
10 1590000 1446900 804000 731640
Total 10930000 9946300 6870000 6251700

Cost Benefits Ratio:

BCR= Total Discounted Benefit / Total Discounted Cost

=9946300/6251700

=1.5909

=1.6

The result of BCR is 1.6 which indicates the current discounting rate the plant nursery project will be a very much profitable one.

 

Conclusion:

Cost-Benefit analysis or CBA is a process or tool to support decision making in projects.  The imaginary nursery project gives an idea how CBA can put numerical insights in decision making. CBA is a necessary for every project that indicates the project will be profitable or not. Government should imply it in every sensitive project especially project related to natural environment.

I think after reading this article properly you can understand every ins and outs of the cost benefit analysis. Still you have any confusion, please free to leave a comment here.

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