Cost-Benefit Parameters for a Financial Analysis

okay so we've looked at a number of factors to consider when conducting a cost-benefit analysis now let's put all the information we need into a spreadsheet so we have something to work with let's say we're starting a small eco tourism thing will provide the lodging all the food the guests can come and watch the monkeys it'll be great but let's do a financial cost-benefit analysis to see if this project is worthwhile this will be from our perspective the private perspective so remember costs and benefits are measured in the money coming in and out of our company also let's assume we've already factored out inflation and we're working with real numbers first let's set the lifespan of our project let's say it's gonna take us the first two years to get set up then we'll open and then we'll operate for 15 years we're not gonna show it in this video but all under here is where we will be calculating our cash flows you might be confused why this top set 16 instead of 17 it's because we call everything from now up till the end of the first year year zero so this is actually the first year and we count one two three four all the way up to 17 so we call this year 16 but there are technically seventeen years we're looking at in case that was confusing to you know well it confuses me next to be able to estimate the costs and benefits we're first gonna want to know how many guests we might have with our facilities let's say we're gonna have a maximum occupancy of 20 people for our average occupancy rate we're likely to only have about half of the rooms filled on any given day but this will slowly increase over time so let's say for the first three years we'll have an average occupancy rate of 54 percent for the next five years this is estimated to increase by two percent to 56 percent and after that we'll say our occupancy is an average of 59 percent so that's the average number of people that are using our facilities on any given day next we're going to want to know how many guests we're gonna have per year we're going to multiply our maximum occupancy by our occupancy rate for each year which gives us the average number of people who are gonna get every day and then we just multiply that by a 365 days for the year so four years two through four will have an estimated 3000 942 guests per year four years five through nine will have an estimated 4,000 eighty-eight guests per year and four years 10 through 16 will have an average four thousand three hundred and seven guests per year or rather this should be guests days per year as this will probably be the same guests for multiple days okay so these numbers are the number of times per year our guest is charged for a day okay for the benefits our revenue will have money coming in from the daily charge to customers so let's set up our prices we'll start the price low and increase it over time let's say two hundred dollars so the first year as we try things out then we'll increase it to three hundred and twenty dollars for the next two years then let's just assume that the price is going to increase by 15% after year four and again after year nine there that's all the information we need for our revenue now let's set up the costs we'll separate it into fixed costs costs that don't change no matter how many people use the facilities like the cost of building it and variable costs costs that do change like the cost for food based on how many guests we have for fixed costs we have the construction cost of the buildings and facilities 2 point 1 million dollars these costs will happen during the first year we'll make a little note of that we can delete it later we'll have startup costs this could be things like the hiring and training process putting in a booking system advertising setting up arrangements with local communities and whatever else and I just messed that up this should be year 0 we're constructing it in the present year and then the startup costs happen in the second year in year 1 see it's confusing we'll buy equipment in year 2 when we open and they'll have to be replaced every five years and let's make a note of that above the time line so it's easier we'll have to pay rent on the land every year as well as insurance every year and we'll also have to pay a property tax every year and every year we'll pay the staff I guess okay that's our fixed costs for variable costs we'll have the operating and maintenance costs this could be like the cost of cleaning the rooms or the administration cost of taking on a guest we will have the cost per guest of transportation and tours and the cost of food per guest so later to calculate these costs we'll multiply the cost per guest by the number of guests days in a year so these are all of our costs there's one more revenue item we need to include when the project is all done the buildings will still have a bit of useful life in them and we can sell them off this is called the residual or salvage value this will be 10% of the original construction costs and it will happen in the last year and finally we'll discount at a rate of 10% oh and this is the real discount rate ok neat and the next video will setup the cash flows and calculate the net present value in the internal rate of return