How to Conduct a Cost Benefit Analysis

Cost Benefit Analysis and the City’s Water Dilemma Introduction This memorandum focuses on describing the value of cost benefit analysis. It does so by applying the first four steps of the U.S. Army Cost Benefit Analysis Guide as they relate to the city’s need to increase its water treatment capacity.

The purpose of this memorandum is not to take the faculty of judgment away from any council member but rather to show how cost benefit analysis can facilitate the judgment process and provide support for pursuing the best possible opportunity at this time. Step 1: Define the Problem / Opportunity; Describe the Background Every problem is an opportunity. The problem that the city faces is with respect to its need to upgrade or update its water treatment plant which is more than 40 years old and costly to maintain.

With the large automaker set to come to the unincorporated area of the county, the need to service the increased demand will put severe strain on the treatment plant. The problem is: what to do? This problem can be framed as an opportunity. In fact, it is possible that this problem presents us with several different opportunities. The best way to decide which opportunity is worth pursuing is to conduct a cost benefit analysis. And the first step of the cost benefit analysis is to construct a problem statement.

The problem statement is this: A large auto manufacturer is coming to the county and the city’s water treatment plant will be tasked with meeting the new demand that the manufacturer will bring. The plant is already operating at maximum levels and maintenance of the plant is only getting more and more expensive. The plant is over 40 years old and there are costs and benefits associated with each of the possible solutions that could be employed to address this problem.

Step 2: Define the Scope; Formulate Facts and Assumptions The second step is to identify the stakeholders involved in the problem and the facts, limitations and assumptions associated with the problem. The stakeholders involved in this problem are the residents of both the unincorporated county and the city, both of whom rely on the water treatment plant. The auto manufacturer is also a stakeholder although the organization has not yet arrived. The city council and mayor are also stakeholders, as they are responsible with providing a solution to the problem.

The facts of the matter are that: (a) the water treatment plant cannot take much more—it is already operating at near full capacity for the 250,000 residents of the city and the 250,000 residents of the unincorporated county; those numbers are only likely to grow given the arriving auto manufacturing plant will be bringing growth to the city; (b) this means that the water treatment plant must either be expanded, updated, or a new one constructed in order to meet the growing demand; (c) however, if the auto manufacturing plant were to move, the promised growth might never materialize and the need for an expanded plant would them seem unnecessary; (d) still, the cost of maintenance of the plant is rising and its age alone indicates that a new plant is required; (e) where the money will come from to update and build a new plant is unknown.

The assumptions of the matter are that the auto manufacturing plant is coming and that everyone is in agreement that the plant must be expanded, updated or that a new one should be built. If there is any disagreement about any of these two points on the council, it needs to be addressed right away, because it would present further possible solutions and opportunities that will have their own costs and benefits that need to be analyzed.

For the purposes of this memorandum, these assumptions are made known but may be challenged by the council. The limitations of the problem are that it is not known whether the funds are available to even address the problem at this time. It is not known if such a solution would be feasible in light of the city’s budgetary needs. That is something that must be considered by the council and the mayor. Step 3: Define Alternatives The third step involves developing possible solutions.

These are known as alternatives to the problem or viable alternatives that may be used to address the situation. Each viable alternative will have its own costs and benefits. Those can be discussed in later steps. In this step, the most main focus is on identifying the different possible ways to turn this problem into an opportunity. A baseline status quo solution is presented at the end of this section. The first viable alternative is: Develop a new water treatment plant to service both the city and unincorporated city.

This would serve both the city and the unincorporated county. The only question would be who would pay for it and who would funds be allocated to the plant? The second viable alternative is: Update the existing water treatment plant and incorporate the unincorporated county into the city so that their taxes can go to paying for the updates since they will be serviced by the new plant. This will help the city in that it will be able to tax the new auto manufacturer as well.

Problems with this are that the auto manufacturer may object to being incorporated into the city, as moving to an unincorporated county was viewed as one of the benefits. The third viable alternative is: Expand the current plant so that it can handle more capacity but still be stuck with facing the rising the maintenance costs. These costs could potentially be offset by a raise in taxes. That would have to be discussed by the mayor and the council. Other possible sources of funding could also be found.

The status quo would be to do nothing and let the water treatment plant go until there is a major problem at which time the city can address it by allocating funds from the budget to fix it and taking funds from elsewhere. This could be explained to the public as a necessity and could possibly be an opportunity for the city to raise taxes or to continue to cut funding to programs that it simply does not have money. Pensions could be placed on the chopping block.

Each of these alternatives is suitable, feasible, acceptable, distinguishable and complete in their own ways—except for the status quo, which by its very nature is impossible to be acceptable as the status quo presents the nature of the problem in the first place. Nonetheless, the three viable alternatives do present suitable, feasible, acceptable and distinguishable pathways to addressing the situation.

Others could also be found once the council convenes, which is why it is important for the council members to discuss these alternatives and discover if any others are missing. Step 4: Develop Cost Estimates for Each Alternative In the fourth step, the direct and indirect costs of the viable alternatives must be assessed. 1st order costs are related to the project and include both direct and indirect costs.

2nd and 3rd order effect costs also need to be identified, but they are sometimes difficult to identify because they are not clearly visible. One must be able to see how causes have effects and what the cost effects will be for the implementation of an alternative (U.S.