Cost Benefit Analysis (Sample 1) - DoD ESI

1 VA Information Technology Capital Investment GuideJune 15, 2000 APPENDIX F-1 cost Benefit Analysis SAMPLE 1179 Post Implementation Review AnalysisThis appendix consists of a sample cost Benefit Analysis developed as a supplement tothe cost Benefit Analysis guide for NIH IT Projects, originally prepared by RobertLagas, National Institutes of Health, Department of Health and Human Services dateMay 1999. The Trail Boss Interagency Committee has designated this guide as a bestpractices approach. This is not a normal CBA, but it is the kind that may be used as part of an investmentreview process in an Analysis is much simpler and easier to do than the CBA that should be done beforea system is designed and implemented.

2 This sample was selected because it illustratesthe basic concepts of ignoring sunk (past) costs, discounting costs and benefits ,comparison of costs and benefits , and the use of Benefit - cost Ratio and rate of returnon investment. Sample 2 (Appendix F-2) addresses all of those concepts plus acomparison of cost alternatives at the beginning of the project. This sample is based onSample 2, and assumes that a CBA was done at the beginning of the project, and thecost and Benefit estimates from that report could have been updated to do this of ContentsEXECUTIVE SUMMARY 1801 INTRODUCTION PURPOSE AHR INVESTMENT REVIEW PROCESS HRMES

3 BACKGROUND 1822 Analysis OVERVIEW 1823 COSTS OPERATIONAL COSTS MAINTENANCE COSTS TOTAL COSTS 1834 benefits 1835 COMPARISON OF COSTS AND benefits 1846 CONCLUSIONS 1847 RECOMMENDATION 185 VA

4 Information Technology Capital Investment GuideJune 15, 2000 APPENDIX F-1 ( cost Benefit Analysis sample 1 CONTINUED)180 EXECUTIVE SUMMARYThis cost - Benefit Analysis was performed to satisfy a requirement of the AHRI nformation Technology Investment Review Process. The process requires that a Post-Implementation Review (PIR) be conducted for each new IT system within 18 monthsafter the system becomes operational. The HRMES became operational 14 monthsago, and this Analysis is a key component of the PIR. It addresses the latest projectionsof the costs and benefits of the system to determine if the system should continue tooperate as currently implemented.

5 It will also be used to determine how accurate theprevious estimates were for the costs and benefits of the of the basis concepts of cost - Benefit Analysis is not to consider sunk costs (moneyalready spent). This appears to be consistent with the one of the purposes of the PIR,which is to determine whether or not to proceed with the project according to the currentplan. Because this Analysis is being done after the development costs have beenincurred, the purpose of this cost - Benefit Analysis is not to determine if the projecteddevelopment and operational costs of the system will be justified by the projectedbenefits, but rather to evaluate whether the projected costs and benefits (starting withFiscal Year 2000) justify continuation of the comparison of the benefits relative to the costs of continuing the system indicatesthat the project should continue.

6 The table below demonstrates that the benefits exceedthe costs of operating and maintaining the system through the remainder of its life Benefit / cost Ratio of for the seven-year period basically means that we aregetting $ in benefits for every dollar spent during that time period. That is a 6%return on investment (ROI).Description / FY2000200120022003200420052006 TotalAnnual Costs310,000310,000310,000310,000310,000 310,000310,0002,170,000 Annual Benefits328,155328,155328,155328,155328, 155328,155328,1552,297,083 Discount Costs (DC)304,566293,983283,767273,907264,3892 55,201246,3331,922,147 Disc.

7 benefits (DB)322,403311,200300,386289,948279,8722 70,147260,7602,034,714 Disc. Net (DB-DC)17,83717,21716,61816,04115,48414, 94614,426112,568 Benefit / cost recommendation is that the operation of HRMES should continue; however, thelow ROI will place it at risk when it competes with other projects for the limited fundsavailable for centrally funded IT comparison of the original estimates to the actual expenditures and currentprojections for costs and benefits is shown below:DevelopmentAnnual Operations andMaintenanceAnnual BenefitsOriginal Estimate$732,177$214,080$492,232 Current Estimate or Actuals$735,857$310,000$328,155 The following chart shows an updated comparison of the costs and benefits projected inthe original cost - Benefit Analysis .

8 VA Information Technology Capital Investment GuideJune 15, 2000 APPENDIX F-1 ( cost Benefit Analysis sample 1 CONTINUED)181 YearAnnualCostACAnnualBenefitABDiscountF actorDFDiscountedCost (DC)ACxDFDiscountedBenefit (DB)ABxDFDiscountedNetDB-DCCumulativeDis countedNet1268, ,4370(263,437)(263,437)2467, ,5540(443,554)(706,991)3310,000328, ,767300,38616,618(690,372)4310,000328, ,907289,94816,041(674,331)5310,000328, ,389279,87215,484(658,848)6310,000328, ,201270,14714,946(643,902)7310,000328, ,333260,76014,426(629,476)8310,000328, ,774251,69813,925(615,551)9310,000328, ,511242,95213,441(602,110)10310,000328, ,536234,51012,974(589,136)Total3,215,857 2,625,2382,719,4092,130,272(589,136)This shows that the cost of development will not be recovered during the life of thesystem.

9 The Discounted Costs exceed the Discounted benefits by nearly $600,000 overthe life cycle of the system. This gives us a negative return on investment. If thenumbers above were used in the original CBA, the project would have been terminatedbefore the development was INTRODUCTIONThis section explains the purpose of this Analysis , includes information about theDepartment of Health (DOH) Agency for Health Research (AHR) investment reviewprocess, and provides background information on the Health Research ManagementEvaluation System (HRMES).

10 PURPOSEThis cost - Benefit Analysis was performed to satisfy a requirement of the AHRI nformation Technology Investment Review Process. The process requires that aPost-Implementation Review (PIR) be conducted for each new IT system within18 months after the system becomes operational. The HRMES becameoperational 14 months ago, and this Analysis is a key component of the PIR. Itaddresses the latest projections of the costs and benefits of the system todetermine if the system should continue to operate as currently implemented. Itwill also be used to determine how accurate the previous estimates were for thecosts and benefits of the AHR INVESTMENT REVIEW PROCESSThe AHR Chief Information Officer (CIO) established an AHR IT InvestmentReview Process as an integral part of compliance with the Clinger-Cohen Act.