Case Study: Arapahoe County Cost-Benefit Analysis

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This memorandum focuses on the Arapahoe County cost-benefit analysis. The Human Resources Department has developed a pilot program for the Human Services Department. This program will suggest to employees who already receive their health insurance through the County, that they take a fixed stipend to help toward health, retirement, and other benefits rather than the traditional package. The purpose of the pilot program is to manage the County’s increasing costs for health care insurance. The cost-benefit analysis will allow for an evaluation of the pilot program in the Human Services Department and make some changes to control risks and uncertainties that impact the Net Present Value (NPV). This analysis relies completely on accuracy of the…show more content…
The stipend is $5,000 for each participant each year, so the stipend increases by the County’s standard escalation rate of 3.5%, then it is prorated by 50% to $ 2,500 for the first year (Transition Year) when the benefits are paid only for the first six months. The cost of the first year is $ 12,500 and the on-going costs for the Operational Years will increase by the value of 3.5%. The stipend as a recurring cost will yield a benefit return for the department. Another significant aspect is the one-time payments of $10,000 for each of the 5 participants for retirement. Then the actual cost will be $50,000, which is a cost-benefit. The cost- benefit indicates that the department will be able to cover all its expenses and it will begin to make a profit…show more content…
The discount rate is a significant element which is considered the value of future cash flows, whether they are earnings or obligations. By applying net present value (NPV), which is a useful tool, the department can determine whether a project will result in a net profit or a net loss. In this case, by calculating the NPV, the department found out that the NPV is positive, indicating that the benefits outweigh the costs, and the project will pay for itself making a profit over time. Therefore, the pilot program is worthwhile and the investment would add value to the department. Another major metric for cost-benefit analysis is cost-benefit ratio, which plays an important role in this project. The total discount benefits are divided by the total discounted costs, which equals 1.07. The benefit-cost ratio of this project is greater than 1, which shows that the benefits are greater than the costs. Also, the payback period is the one main piece of the sensitivity analysis in this project because it tells us how long the initial investment is at risk. By calculating the NPV, which is a negative number, the department can estimate if the NPV for the third Operational Year is still a deficit. However, when the sum turns positive in
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