This assignment asks you to provide a preliminary benefit-cost analysis report in support of a FEMA hazard mitigation grant proposal for Somewhere City in Anywhere County, AZ.
Because your prior experience in mitigation, you are asked by the Anywhere County Emergency Manager to write up a short explanatory report to assist the novice planner in understanding how the BCA process works; this background report/explanatory overview will help guide that person in developing the overall hazard mitigation grant proposal
Finally, also provide an initial sensitivity analysis, which is to say: please use the Excel sheet provided and modify the discount rate from 7% down to 5%. By using a lower discount rate, please explain how that would change your ultimate recommendation on proceeding with the project—if at all—and what a lower discount rate means substantively. (Both charts are completed and added on the file)
FEMA benefit cost analysis is included on file for source and additional source is uploaded. Benefit Cost Analysis Essay Paper
Benefit-Cost Analysis
Introduction
Mitigation reduces losses that occur due to natural hazards by decreasing susceptibility or decreasing the frequency and intensity of causal factors (Boardman et al. 2018). However, it is important to consider the costs associated with a mitigation project because of the limited resources. Benefit costs analysis is utilized in assessing the expenditures of the project. Benefit Cost Analysis Essay Paper
How the Benefit Costs Analysis Process Works
A benefit costs analysis (BCA) is used to analyze decisions or projects in order to identify all the potential costs, benefits, and revenues that the organization is likely to generate from the project. A BCA involves analyzing the benefits of a project and the associated costs. The costs in CBA involve the direct costs involved in developing the project such as the raw materials, inventory and other resources; indirect costs such as overhead costs, utilities and electricity; intangible costs like negative impact or delivery delays; opportunity costs for instance alternative investment to provide similar services; and costs of potential risks such as the environmental impact or regulatory risks (Boardman et al. 2018).
It is also important to compare the results of the aggregate benefits and costs quantitatively in order to establish if the benefits outweigh the costs. If the benefits outweigh the costs, then it is logical to go forward with the project. However, if the costs outweigh the benefits, it is important to avoid the project because it is not viable or make adjustments to reduce the costs while increasing the benefits (Boardman et al. 2018).
The benefit-costs analysis, therefore, helps to determine if the project is feasible or with developing. If the benefits are greater than the estimated costs, then the project is deemed financially feasible to conduct (Janis et al., 2010). During benefit-cost analysis, monetary measurements should be applied in all items relevant to the project. It is important to be careful not to underestimate the costs or overestimate the benefits in order to have accurate results regarding the feasibility of the project.
The Relevance of BCA to Writing a Grant Proposal
A benefit costs analysis will be helpful in establishing the benefits and the costs associated with the mitigation activity. If the total projected benefits from the mitigation project surpass the total costs, and at a scope comparable to the relevant investment rates of return, then such a mitigation project represents an efficient use of resources. Therefore, it would be important to perform a BCA for the grant proposal in order to establish the viability of the project and demonstrate to the granters that the project represents an efficient use of society’s resources (Janis et al., 2010).
Using the BCA, all the potential positive impacts of the mitigation project will be compared to the costs of the project. The target goal is to reduce future benefits. The BCA will also be useful in evaluating alternative projects to establish the best alternative fiscally. The Benefit-Cost Analysis will be used to demonstrate if the project is cost-effective and hence worth been awarded funding for implementation (Boardman et al. 2018). Benefit Cost Analysis Essay Paper
Logic of Estimating Costs and Benefits/ Merits of the Cost and Benefit Measures
The benefits of the mitigation project will include the avoided losses that are likely to occur if the mitigation activity is not implemented. The benefits associated with the mitigation project include decreased direct property damage for example to building and infrastructure; decreased interruption of business losses such as preventing shutdown of factories due to damage; reduced environmental damage; decreased societal damage such as deaths, homelessness and injuries; as well as decreased emergency response such as fire protection and ambulance services. Other benefits that the mitigation project might prevent include preventing displacement, lost wages, as well as the economic impact that occurs when a hazard occurs that include repairing infrastructure and road closures (FEMA, 2019).
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The costs associated with the mitigation project will only be incurred for a short period, for example when constructing the project and are comparatively certain. However, the operational and maintenance costs are also relevant, even though they are insignificant when compared to the construction costs.
However, benefits from the mitigation project accrue over the project’s life and are very uncertain since they can only be realized if a natural hazard occurs. The projected value of benefits for mitigation projects can only be estimated through the multiplication of the projected total benefits of an event of different sizes with the likelihood of every event and adding all such incidents (Boardman et al. 2018). Moreover, it is important to discount the benefits to the present value terms in order to justify the time value of money. Therefore, estimating the costs and benefits will justify if the project is worth funding.
To establish the viability of the project, all positive and negative aspects of the project will be expressed in terms of a common unit. This implies that all costs and benefits of the project are supposed to be measured in terms of their equal monetary value.
Initial Sensitivity Analysis
Discount Rate at 5%
| Year | Benefits | Costs | Discount Factor | PV for B | PV for C | |
| 1 | 0 | 647000 | 1.05 | 0 | 616190.5 | |
| 2 | 105000 | 15000 | 1.1449 | 91711.07 | 13101.58 | |
| 3 | 105000 | 10000 | 1.225043 | 85711.28 | 8162.979 | |
| 4 | 105000 | 10000 | 1.310796 | 80104 | 7628.952 | |
| 5 | 105000 | 10000 | 1.402552 | 74863.55 | 7129.862 | |
| 6 | 105000 | 10000 | 1.50073 | 69965.93 | 6663.422 | |
| 7 | 105000 | 10000 | 1.605781 | 65388.72 | 6227.497 | |
| 8 | 105000 | 10000 | 1.718186 | 61110.96 | 5820.091 | |
| 9 | 105000 | 10000 | 1.838459 | 57113.04 | 5439.337 | |
| 10 | 105000 | 10000 | 1.967151 | 53376.68 | 5083.493 | |
| Sum of PV Benefits & Present Value Costs: | 639345.2 | 681447.7 | ||||
| Benefit – Cost Ratio: | 5% discount rate for sensitivity analysis | |||||
Discount Rate at 7%
| Year | Benefits | Costs | Discount Factor | PV for B | PV for C | |
| 1 | 0 | 647000 | 1.07 | 0 | 604672.9 | |
| 2 | 105000 | 15000 | 1.1449 | 91711.07 | 13101.58 | |
| 3 | 105000 | 10000 | 1.225043 | 85711.28 | 8162.979 | |
| 4 | 105000 | 10000 | 1.310796 | 80104 | 7628.952 | |
| 5 | 105000 | 10000 | 1.402552 | 74863.55 | 7129.862 | |
| 6 | 105000 | 10000 | 1.50073 | 69965.93 | 6663.422 | |
| 7 | 105000 | 10000 | 1.605781 | 65388.72 | 6227.497 | |
| 8 | 105000 | 10000 | 1.718186 | 61110.96 | 5820.091 | |
| 9 | 105000 | 10000 | 1.838459 | 57113.04 | 5439.337 | |
| 10 | 105000 | 10000 | 1.967151 | 53376.68 | 5083.493 | |
| Sum of PV Benefits & Present Value Costs: | 639345.2 | 669930.1 | ||||
| Benefit – Cost Ratio: | 7% discount rate for sensitivity analysis | |||||
From the lower discount rate, it is recommended that the project should continue. This is because the discount rate reduced from 7% to 5%, which is positive. High discount rates produce lower value to accruing benefits and therefore a lower discount rate will tend to give higher value to benefits that will accrue after long periods for the proposed mitigation project (Pradhan & Jamison, 2019).
References
Boardman, A, Greenberg D, Vining A & Weimer D. (2018). Cost-Benefit Analysis: Concepts and Practices. (5th ed.). Cambridge: Cambridge University Press.
FEMA. (2019). Benefit-Cost Analysis. https://www.fema.gov/benefit-cost-analysis.
Janis, A., Stiefel, K.M., & Carbullido, C.C.(2010).Evolution of a monitoring and evaluation system in disaster recovery: Learning from the Katrina Aid Today National Case Management Consortium. In L.A. Ritchie & W. MacDonald(Eds.) Enhancing disaster and emergency preparedness, response, and recovery through evaluation. New Directions for Evaluation, 126, 65-77.
Pradhan E & Jamison D. (2019). “Standardized Sensitivity Analysis in BCA: An Education Case Study.” Journal of Benefit-Cost Analysis, 10(S1). Benefit Cost Analysis Essay Paper