AEE 577 Class XII

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AEE 577Class XII

• Cost-Effectiveness, Cost-Benefit and Return On
  Investment Analysis

Cost
Benefits
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Objectives

• Upon completion of this lesson, students will be
  able to
• Compare and contrast cost-benefit versus
  cost-effectiveness.
• Estimate program costs.
• Describe difference between tangible and
  intangible benefits.
• Estimate program benefits.
• Describe the key steps in conducting a
  cost-benefit analysis.
• Conduct a cost benefit/ROI analysis.
• Discuss the common issues and problems with
  cost-effectiveness and cost-benefit/ROI analysis.

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What Do We Mean By Cost Effective Analysis?

• Cost effective analysis relates program costs to
  a unit measurement of program outcomes.
• Examples
• Cost of certifying a pesticide applicator
• Cost of educating a consumer on food safety
• Cost of building leadership skills of a youth.

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Cost Effectiveness Ratio

• The value of program costs divided by the number
  of outcome units of the program.
• Example Cost effectiveness ratio of pesticide
  applicator certification training
• If an extension program spent 5,000 to certify
  25 pesticide applicators, the cost effectiveness
  would be 5,000/25200

Total cost of the program ()
Number of pesticide applicators certified
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Advantage of Cost Effectiveness Analysis

• Advantages
• Cost effectiveness analysis is a good estimate to
  compare effectiveness of similar programs.
• Cost effective analysis is easy to calculate. It
  is not necessary to convert outcomes into
  monitory values.
• Disadvantages
• It is problematic when comparing programs with
  different outcomes. For example, comparing the
  effectiveness of pesticide applicator
  certification training with the effectiveness of
  youth leadership education program.

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Tangible and Intangible Benefits

• Tangible benefits are those that one can readily
  identify in units convertible to dollar values.
  Examples Bushels of corn yield increased,
  Reduced cost of production per acre.
• Intangible benefits are difficult to quantify and
  convert into dollar values. Example Quality of
  environmental improvement, community development.

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What Do We mean By Cost-Benefit Analysis

• The analysis of cost-benefit means the systematic
  comparison of program benefits with program costs
  to assess the relative value of benefits and
  costs of an Extension program.

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Types of Cost-Benefit Analysis

• Benefit-Cost Ratio (BCR)
• Return on Investment (ROI)

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Benefit-Cost Ratio (BCR)
This is the ratio between the total value of
gross benefits to the total costs of an Extension
program.

Total Value of Benefits
Benefit Cost Ratio

Total Costs
BCR ratio tells the value of gross benefits for
one dollar spent in this program.
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Calculating CBR
If the total cost of your Extension program is
10,000.00 If the total value of your program
benefits is 90,000.00
90,000.00
9 1
Benefit-Cost Ratio
10,000.00
That means, every dollar spent in this Extension
program generates 9.00 worth gross benefits to
the society.
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Return On Investment (ROI)

• This is the ratio of net benefits to the total
  costs of an Extension program.
• Normally, the ROI is expressed as a percentage.

Net Benefits X 100
Return On Investment

Total Costs
Net benefits Gross benefits total cost
ROI explains the value of net benefits for 100
invested in this program.
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Calculating ROI
If the total cost of your Extension program is
10,000.00 If the value of your program benefits
is 90,000.00 The net value of program
benefits is 90,000.00 - 10,000.00
80,000.00
80,000.00 X 100
ROI
800
10,000.00
That means, every 100.00 invested in this
Extension program generates 800.00 worth net
benefits to the society.
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Why Do We Need Cost Benefit Analysis?

• Key stakeholders are demanding accountability
  data for public funding.
• Benefit-cost analysis is very helpful to
  communicate the program results with key
  stakeholders.

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Is Cost-Benefit Analysis Possible?

• Yes, if you plan in advance and keep records.
• You may not be able to conduct cost benefit
  analysis with some of your programs due to lack
  of monitory values of benefits.
• Start cost benefit analysis with possible,
  comprehensive Extension programs.

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Data Needed for Cost-Benefit Analysis

• Estimated value of total benefits of the program
• Estimated total cost of your program

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Steps for Conducting a Cost Benefit Analysis

• Determine the program for cost benefit analysis
  at the planning stage.
• Identify the possible outcomes and impacts.
• Plan to document your program outcomes and
  impacts.
• Identify outcomes and impacts that can be
  converted into monitory values
• Collect impact data.

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Steps for Conducting a Cost Benefit Analysis

• Make sure not to double count or exclude
  important impacts.
• Convert outcome and impact data into monitory
  values. (Use research data and make assumptions.
  State the assumptions you made.)
• Estimate the total value of the program outcomes
  and impacts. This is the total value of benefits
  or returns.

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Steps for Conducting a Cost Benefit Analysis

• Keep records to determine the number of hours you
  spent for the program.
• Estimate the total cost of your program.
• Calculate the Benefit-Cost Ratio and ROI.

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Estimating the Costs of Extension Programming

• John Richardson developed this method in 1997.
• If your salary is 40,000
• Your benefits is 25 of your salary
• Value of benefits 40,000 X25
• Value of benefits 10,000
• Value of salary benefits 40,00010,000
• Value of salary benefits 50,000
• There are 2,000 work hours per year
• The cost of one hour (just for your time) is
  50,000/2,000 25

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Estimating the Costs of Extension Programming

• When you develop, deliver, and evaluate your
  program you use many resources in the
  organization.
• The cost estimate of all the other resources used
  is equal to the value of your time.
• Therefore, the value of one hour of program time
  would be 25 X2 50/hour

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Estimating the Costs of Extension Programming

• If you have spent 100 hours for planning,
  delivering, and evaluating your program then the
  value of total program cost 50 X100 5,000

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How to Estimate the Value of Program Benefits?

• Identify and collect impact data that you can
  convert into monitory values.
• You may use any one or combination of the
  following types of benefits (p.6)
• Actual cost savings
• Potential cost savings
• Value of minimized risk
• Opportunity cost savings
• Increased income
• Potential income

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Estimating the Value of Benefits

• Use the monitory values available or collected
  from your participants.
• When monitory values are not available, use the
  best estimate as an alternative.
• When you estimate benefits, be conservative.
• Search for available data from other sources.
• Cite your sources
• State your assumptions

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Actual Cost Savings

• This is the amount of money saved as a result of
  changing behaviors or adopting new practices.
• For example if a farmer saved 9.50 per acre for
  seeds as a result of the practices learned from
  your training, then you can use this value as the
  actual cost saving.

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Potential Cost Savings

• For example, if you prevent diabetics among 10
  people there is a value of preventing potential
  medical expenditures.
• If you prevent a high school student dropout,
  there is a value of social cost associated with
  high school dropout.

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Increased Income

• This is the amount of money received as a result
  of increased production, quality of product or
  service.
• For example, if growers increased their soybean
  yield by 1.5bushels per acre in average, and the
  price of soybean is 6.00 per bushel, the value
  of increased production would be 9.00 per acre
  in average.

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Potential Income

• For example, potential income of a 4-year college
  graduate is 45,000.00 per year in average.

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Example Soybean Population Reduction Program
(p.8-9)

• Total acreage of soybean planted and harvested
  with lower populations by the farmers who
  completed the program (If the soybean acreage is
  20,000)
• Average reduction of seed used per acre (If the
  average reduction of seeds used is 17 pounds per
  acre)
• Average reduction of seed rate (Average amount
  of seed used per acre before following the
  reduced seed rate Average amount of seed used
  after following the reduced seed rate)

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Example Soybean Population Reduction Program
(p.8-9)

• Average price of soybean seeds (If the average
  price of soybean seed is 0.58/Pound)
• Average yield increase (If the average yield
  increase is 1.5 Bushels per acre)
• Average yield increase (Average yield after
  following the reduced seed rate Average yield
  before following the reduced seed rate)

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Example Soybean Population Reduction Program

• Average selling price of soybean (if the average
  selling price of soybean is 6.00/Bushel)
• Extension agents annual salary (If your annual
  salary is 40,000, based on cost calculation
  described above, the value of your programming
  time would be 50.00/hour)
• Number of hours you spent for planning,
  developing, delivering, and evaluating your
  program (If you have spent 200 hours in this
  program, then the total cost would be
  50.00X200 10,000.00)

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Example Soybean Population Reduction Program
Cost Savings
Increased Income
(Dumphy, 2007)
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Example Soybean Population Reduction Program
The Total Value of Benefits (Total Cost
Savings) (Total Income) 197,200.00
180,000.00 377,200.00
Benefit-Cost Ratio Value of benefits / Value
of costs Benefit-Cost Ratio 377,200.00/10,000
37.72 1 Benefit-cost ratio tells that
every dollar spent in this program generates
37.72 worth gross benefits to the society.

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Example Soybean Population Reduction Program
Net value of benefits X 100
Return On Investment (ROI)

Total Program Cost
Net value of benefits (Total benefits Total
costs) 377,200.00 - 10,000 367,200.00
ROI (367,200 / 10,000)100 3,672 ROI
tells that every 100 invested in this program
generates 3,672 worth net benefits to the
society.

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Example Healthy Lifestyle Education (p.14-15)

• Number of participants adopted a healthy
  lifestyle by changing their dietary and exercise
  habits. (If the total number of participants who
  improved their dietary and exercise habits is 40)
• Potential for getting diabetics among the
  population. (According to CDC, 8.2 of the
  population in NC have a chance of getting
  diabetics)

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Example Healthy Lifestyle Education

• Healthy lifestyle minimizes the potential for
  chronic diseases such as cardiovascular diseases
  and diabetes.
• Healthy lifestyle can decrease the development of
  diabetics among high risk groups by 71 (Net
  Wellness, 2006, para.4)
• Among the 40 participants, (40X 8.2/100 3.28)
  nearly 3 individuals have a chance of getting
  diabetics.

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Example Healthy Lifestyle Education

• As a result of adopting a healthy lifestyle, 71
  of these three individuals (3 X 71/100 2) will
  be able to reduce the risk of diabetics. That
  means there is a great potential to prevent
  diabetics among 2 persons of the 40 people who
  adopted a healthy life style.
• According to the American Diabetics Association,
  "Per capita medical expenditures totaled 13,243
  for people with diabetes and 2,560 for people
  without diabetes (2003, para.3). That means a
  diabetics person would cost (13,243.00 - 2,560)
  10,683.00 additional amount of medical
  expenditure per year.
• The medical cost savings by preventing diabetics
  among 2 persons would be (10,683.00 X 2)
  21,366.00/year.

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Example Healthy Lifestyle Education

• Average age of participants (If the average age
  of participants is 50 years)
• Life expectancy (If the life expectancy is 75
  years)
• The potential medical cost savings by the two
  persons who prevented diabetics over 25 year
  period of their life would be (21,366 X 25)
  534,150.00

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Example Healthy Lifestyle Education

• Extension agents annual salary (If your annual
  salary is 40,000, based on cost calculation
  described earlier, the value of your programming
  time would be 50.00/hour)
• Number of hours you spent for planning,
  developing, delivering, and evaluating your
  program (If you have spent 100 hours in this
  program, then the total cost would be
  50.00X100 5,000.00)

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Example Healthy Lifestyle Education
Cost Savings
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Example Healthy Lifestyle Education
The value of total benefits of the program
(Total Cost Savings)
534,150.00

Total Benefits
Benefit-Cost Ratio
Total Costs
Benefit-Cost Ratio of this program
534,150.00/5,000.00 106.8
1 Every dollar spent in this program generates
106.8 worth gross benefits to the society.
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Example Healthy Lifestyle Education
Net value of benefits X 100
Return On Investment (ROI)

Total Program Cost
Net value of benefits (total benefits total
cost) 534,150.00-5,000.00
529,150.00 ROI (529,150.00/5,000
.00)100 10,583 ROI tells that every
100 invested in this program generates 10,583
worth net benefits to the society.

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Issues Alternatives

• Issue Sometimes, it is difficult to place a
  dollar value on all program benefits. This is the
  main issue in estimating benefits.
• Alternative- Use the approaches discussed as
  alternatives.

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Summary

• Cost effectiveness analysis
• Cost-benefit analysis
• Cost-Benefit Ratio
• Return-On-Investment Ratio
• Calculation of CBI and ROI