An exercise on COST-BENEFITS ANALYSIS

WeDeliver Warehousing (P) Ltd. is an80 employees organisation and operating as logistics
partner for Mazon India Ltd., a subsidiary for Mazon Inc. of US.

WeDeliverhadseen a growth of almost 35% per year since last three years in a row. The
organisation enjoys a flat structure and is fairly competitive in the overall supply chain and
logistics business in India. The span of control generally follows a 1:16 ratio across its six
divisions. Over the last two years the business has seen tremendous shift in terms of adopting
technology in logistics and major other functions of the organisation.

The top team is considering development of a fully customised HRIS, to begin with, to meet
the increasing complexity of managing various teams of employees spread across India. A
Cost-Benefit Analysis is being suggested by the HR and Logistics expert here.

Assumptions

 Currently, the company has more work than it can cope with, and part of the work is
being outsourced to other firms at a cost of Rs. 100 per assignment. The company
outsources an average of 100 such assignments each month.

 Top team estimates that revenue will increase by 50 percent with an HRIS in place.

 Per-person productivity will increase by 10 percent with more time and information at
hand via an HRIS.

 The analysis horizon is one year: that is, WeDeliver expects benefits to accrue within
the year.

Costs

Category Details Cost in First Year

750 square feet available next door at Rs. 18

Lease. per square foot (per month) Rs. 13,500.00*12

Leasehold Knock out walls and reconfigure office

improvements. space Rs. 50,000.00

Hire two HRIS Salary, including benefits Rs. 2,25,000.00

designers.
Recruitment costs Rs. 5,250.00
 Category Details Cost in First Year

Orientation and training Rs. 3,000.00

Furniture and hardware Rs. 60,000.00

Two additional Software licenses Rs. 10,000.00

workstations.

Construction Two weeks at approximately Rs.

downtime. 2,00,000.00 revenue per week Rs. 4,00,000.00

Total Rs. 7,80,250.00

Benefits

Benefit Within
Benefit
12 Months

50 percent revenue increase. Rs. 26,00,000

SavingRs. 100 per assigement outsourcing (100 assignment per

month, an average) Rs.60000

10 percent improved productivity foremployees (Rs. 2,00,000.00/12

per week at present; with a 10 percent increase = Rs.
20,000.00/week.) Rs. 5,20,000

Improved customer service and retention as a result of 100 percent

in-house design. (additional 10% in revenue ) Rs.5,20,000

Total Rs. 37,00,000

The HR expert calculates the payback time as shown below:

COSTS / BENEFITS = 7,80,250/37,00,000= 0.21*12=2.53…. of a year, or approximately

….. months.
Inevitably, the estimates of the benefit are subjective, and there is a degree of uncertainty
associated with the anticipated revenue increase. Despite this, the owner of WeDeliver
decides to go ahead with the expansion and hiring, given the extent to which the benefits
outweigh the costs within the first year.

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Flaws of Cost-Benefit Analysis

Cost-Benefit Analysis struggles as an approach where a project has cash flows that come in
over a number of periods of time, particularly where returns vary from period to period. In
these cases, use Net Present Value  (NPV) and Internal Rate of Return  (IRR) calculations
together to evaluate the project, rather than using Cost-Benefit Analysis. (These also have the
advantage of bringing "time value of money" into the calculation.)
Also, the revenue that will be generated by a project can be very hard to predict, and the
value that people place on intangible benefits can be very subjective. This can often make the
assessment of possible revenues unreliable (this is a flaw in many approaches to financial
evaluation). So, how realistic and objective are the benefit values used?

Key Points
Cost-benefit analysis is a relatively straightforward tool for deciding whether to pursue a
project.

To use the tool, first list all the anticipated costs associated with the project, and then estimate
the benefits that you'll receive from it.

Where benefits are received over time, work out the time it will take for the benefits to repay
the costs.

You can carry out an analysis using only financial costs and benefits. However, you may
decide to include intangible items within the analysis. As you must estimate a value for these
items, this inevitably brings more subjectivity into the process.