The proposal provides the cost-benefit analysis of the National Guard Armory project intended to be implemented by the Massachusetts State government. The report uses the net present value and the present value to evaluate the viability of the project. The findings reveal that benefits to be derived from the project outweigh the costs.
¶ … benefit Analysis
Cost benefit analysis is a systematic process of comparing and calculating costs and benefits of a project. The benefit of cost-benefit analysis is to determine the justification of a project in order to enhance a sound investment decision. The cost-benefit analysis also assists in comparing projects based on their expected costs and benefits and determines whether the benefits of a project outweigh the costs. Discounting is a technique to compare the present value of a project against the benefits received in different periods in a project lifecycle. (Richard, Zerbe, & Joseph 2010).
Objective of this report is to use a cost-benefit analysis to evaluate the proposed project of National Guard Armory of the State of Massachusetts.
Project Overview
The State of Massachusetts attempts to replace the National Guard armory that is rapidly reaching its service life. According to the Department of Military Affairs, the special maintenance will be $275,000 annually while the rehabilitation of facility would cost $4,000,000, which would extend the armory's service life by 15 years. Based on the information provided, the report calculates the Discount Factor for each year using 4% discount rate for 15 years.
Calculation of Discount Factor of the Project
A discount factor calculates the value that a future sum of money will worth presently. The discount factor of each year of the project is as follows:
Year
Interest Rates
Discount Factor
0
4%
1
1
4%
0.9615
2
4%
0.9246
3
4%
0.8890
4
4%
0.8548
5
4%
0.8219
6
4%
0.7903
7
4%
0.7599
8
4%
0.7307
9
4%
0.7026
10
4%
0.6756
11
4%
0.6496
12
4%
0.6246
13
4%
0.6006
14
4%
0.5775
15
4%
0.5553
Calculation of the Annual Present Value Cost of Special Maintenance (15 years)
The paper calculates the annual present value costs of special maintenance of the project for 15 years to enhance greater understanding of the overall costs associated to the project. The total costs of special maintenance of the project for 15 years are $4,125,000 and the breakdown is as follows:
Year
Costs of Special Maintenance of Armory ($)
1
275,000
2
275,000
3
275,000
4
275,000
5
275,000
6
275,000
7
275,000
8
275,000
9
275,000
10
275,000
11
275,000
12
275,000
13
275,000
14
275,000
15
275,000
Total Costs of Special Maintenance for 15 years
=275,000x 15,
=$4,125,000
The costs of rehabilitation of the facility costs $4,000,000. Thus, the overall costs of the rehabilitation and maintenance of the project are as follows:
Total Costs to extend the life of the project for 15 years
Total Costs of Special Maintenance for 15 years
$4,125,000
Costs of the Rehabilitation
$4,000,000
Total Costs Invested
$8,125,000
However, the report estimates the potential delays that might occurs before completing the project. Perincherry and Wu (2012) develop a schedule delay cost model and reveal that one year of delay in a new construction project is equivalent of losing an average of 37 cents on every dollar invested in a project. Perincherry and Wu (2012) reveals that the six government constructions are estimated to costs approximately $6.0 Billion in 2011, which is an average of $1 billion per project. Due to the project delay, the estimated costs of the project are $7.5 Billion. The major factors leading to the increase in the costs of a project because of the delay is that there will be an increase in the costs of materials to be used for the project with the effect of inflation. (Richard, Zerbe, & Joseph 2010). Since the National Guard Armory project is a new project, the report will estimate that the Massachusetts will lose 37 cents on every dollar invested in the project in case the project is delayed for one year. Thus, this report assumes that the proposed project will be delayed for one year. The report will integrate the costs of delay in the final report of the costs-benefit analysis.
Calculating Discounted Benefits of Rehabilitating Armory
The report uses the discounting to calculate the benefits that the State Government is going to derive from the project. Discounting is a technique used to translate the costs and benefits of the present-day project values into the time value of money. The time value of money shows that present money worth more today than in the future because present money could be invested for profits. 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
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