Benefit Analysis Cost Benefit Analysis Term Paper

Excerpt from Term Paper :

Typically, discounting provides an accurate way to assess the economic impact of a project.

To use a discounting to evaluate the costs and benefits of the National Guard Armory, the report analyzes the demand for the Massachusetts State National Guard Armory in the last three years. The Massachusetts government derives revenues from leasing and renting the National Guard Armory and people in the state derive the following benefits from renting and leasing the armory:

National Guard Armory serves as a safe event location for people at a great price,

The armory also assists in putting money back into the community,

The armory assists in generating money to maintain the armories for future events.

Thus, there is a general high demand for the use of the National Guard Armory. Some of the methods that the National Guard armory is in the regular use are as follows:

Graduations/Receptions

Classes/Seminars

Social and Youth Events

Antique Shows

Group Meetings

Rummage Sales

Sports

Dog/Cat Shows

Tournaments and competitions

Charity Events

Birthday Parties and Potlucks

With high demand for the National Guard Armory, the government of Massachusetts realizes $1.4 Million of rental fee retained revenue yearly. The historical revenue generated from the National Guard Armory in Massachusetts is as follows:

(U.S. Dollars)

FY2011

GAA

FY2012

GAA

FY2013

GAA

FY2013

Projected

FY2014

GAA

Historical Budget Levels

1,400,000

1,400,000

1,400,000

1,400,000

1,400,000

(Commonwealth of Massachusetts, 2012).

Based on the historical and projected revenue of the National Guard Armory, the Massachusetts States government will realize approximate $1,400,000 yearly within 15 years.

Projected revenue of the project in 15 years based on the demand for the armory is as follows:

Projected revenue =1,400,000 x 15

Projected revenue =$21,000,000

Thus, the future value (FV) of the project is $21,000,000.

Based on the information collected on the costs and revenues associated with the proposed project, the report evaluates the viability of the project using discounting technique.

Formula for discounting the project is as follows:

PV = FV x [1 + (1 + i) n]

To simplify the calculation, the report substitutes the discount factor of the project in Table 1 to arrive at the present value (PV) of the project with the formula revealed as follows:

PV = FV x [Discount Factor]

The report assumes that there will be a project delay for one year and the report integrates the costs of delay in the calculation. The detailed of the Net Present Value for National Guard Armory table is revealed below:

Net Present Value for National Guard Armory

Time

Estimated Yearly

Returns

Discount Factor

@ 4%

Formula

Net Present Value

Year 0

0

($8,125,000)

Year 1

1400000

0.9615

PV = $1,400,000 x [0.9615 ]

1346100

Year 2

1400000

0.9246

PV = $1,400,000 x [0.9246 ]

1294440

Year 3

1400000

0.889

PV = $1,400,000 x [0.889]

1244600

Year 4

1400000

0.8548

PV = $1,400,000 x [0.8548 ]

1196720

Year 5

1400000

0.8219

PV = $1,400,000 x [0.8219 ]

1150660

Year 6

1400000

0.7903

PV = $1,400,000 x [0.7903]

1106420

Year 7

1400000

0.7599

PV = $1,400,000 x [0.7599 ]

1063860

Year 8

1400000

0.7307

PV = $1,400,000 x [0.7307 ]

1022980

Year 9

1400000

0.7026

PV = $1400000x [ ]

983640

Year 10

1400000

0.6756

PV = $1,400,000 x [0.7026 ]

945840

Year 11

1400000

0.6496

PV = $1,400,000 x [0.6496 ]

909440

Year 12

1400000

0.6246

PV = $1,400,000 x [0.6246]

874440

Year 13

1400000

0.6006

PV = $1,400,000 x [0.6006]

840840

Year 14

1400000

0.5775

PV = $1,400,000 x [0.5775]

808500

Year 15

1400000

0.5553

PV = $1,400,000 x [0.5553 ]

777420

Present Value

$15,565,900

Net Present Value

=$15,565,900- $8,125,000

=$7,440,900

Estimation Costs of Delay

Since the report assumes that the project may be delayed for one year, the report estimates that State of Massachusetts will lose 37 cents on each dollar to be realized from the project. Thus, the costs of delay are as follows:

Costs of delay= 0.37 x $8,125,000

Costs of delay= $3,006,250

New Cost of the project =$8,125,000+$3,006,250

New Cost of the project =$11,131,250

Net Present value =$15,565,900-$11,131,250

Net Present value =$4,434,650

The costs of delay of the proposed project decline the…

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