Cost benefit at the local level often uses a simple tool for
calculating potential benefits of a project. It is the simple payback time.
That is if a project costs $100,000 to do but will save $25,000 per year, then
the simple payback time is 4 years (100,000/25,000). This is not the method
Anderson describes in the text, which employs a method to calculate the time
value of money: discounting. I have added a PowerPoint to the content area
entitled Cost-Benefit Analysis, which reviews this tool again, but the last
slide has a project to assess whether or not to proceed. The project is buying
new garbage trucks for $400,000 with the estimated annual savings of $90,000;
the trucks would last 4 years and would be sold for $100,000. A simple payback
analysis would show a payback of 4.4 years (400,000/90,000); however, the
residual value of $100,000 was not included; adding that in gives a payback of
3.33 years (400,000-100,000/90,000). Would you make the decision to do this
project? Of course, there is a flaw in the simple payback: it does not account
for the time value of money. A dollar today is worth more than a dollar 4 years
from now.

Also in the Content area is a spreadsheet entitled
Discountinggarbage trucks. This spreadsheet has computed the net present value
of this proposal using a 7% discount rate; note that it is negative (-$18,861).
(Negative numbers are often shown in parentheses in Excel.) With a negative
number, you would not recommend doing this project. Since the spreadsheet is
set up for you, I would like you to play around with the discount rate until you
get the smallest possible positive number next to Net Present Value. Tell me
what this number is. Then explain 1) who might want to use a higher discount
rate (you should see a negative number) and 2) who might use a lower number than
the one you found ( a positive result), and why. That’s it.

For those of you who are new to Excel (I hope you use it,
since it is the primary budget and finance tool used at all levels of
government), you simply type over the number in the cell next to the one labeled
Discount Rate to change the rest of the spreadsheet, particularly the net
present value number.

Note: to do this more correctly, you would also have to
include an inflation factor in the formula; we will not do so for this
exercise.

Make sure it is done in excel

Good luck.