Cost-Benefit Analysis - a Free Wi-Fi for City Resident and Public Commuters - Example

Cost-Benefit Analysis: A Free Wi-Fi for City Resident and Public Commuters Name Tutor: Course: Date: Executive Summary A free Wi-Fi connectivity project for city residents is instrumental in enhancing communication and information dissemination to users of public transport. The seminar theme will be on cost benefit analysis through assessment and evaluation of all the benefits and costs involved in the Wi-Fi connectivity project Determination of these costs will largely be affected by financial capability of the project sponsor and the benefits to end users who are city residents and commuters. Cost-benefit ratio (BCR) will be used and discounted as appropriate. For example, a BCR of 1.3:1 will show that for each $1 invested in internet connectivity, the user community will gain $1.3 of benefits. Some of the costs to be evaluated will be server acquisition, data cleaning services, and data transfer rate and system administration charges. The Wi-Fi benefits to be established will be the amount of valuable information reached to users and the level of technology brought to the people. Cost-benefit analysis is important to the government and internet service providers as they will be able to establish the usage rate and the common sites visited by browsers. It is anticipated that the project will have benefits outweighing the initial costs of setting and administering the Wi-Fi project. To undertake cost benefit analysis, the project has to ascertain the feasibility and sustainability of the entire exercise through conventional surveys using cost benefits analysis and planning balance sheet. International chamber of commerce (ICC) supports the right of people to access free flow of information on internet and freedom of expression while the government has an obligation to people’s rights to freedom of expression and information. The results of cost-benefit analyses were presented in tables translated to currency figures. Table of Contents Executive Summary 2 Table of Contents 3 Introduction 4 Existing Situation and Challenges 4 Objectives 4 The alternatives 4 The constraints (Assumptions) 5 The problem: Market Failure and Externalities 5 Project Log-frame (See Appendices) 5 Impact Chart 6 Identifying costs and benefits 7 The Wi-Fi stakeholders 7 Project Planning Balance Sheet 7 The costs Identification 8 The benefits of free Wi-Fi project 8 Economic versus Financial Impacts 8 Identify Financial and Economic Costs 8 Financial and Economic Benefits 9 Financial versus economic impacts of free Wi-Fi project 9 Discount Rate Selection 9 Determining Values 10 Benefits 10 Costs 11 Distribution and Sensitivity Analysis 13 Social communication and organization savings 14 Conclusion 14 Reference list 16 APPENDICES 17 Appendix II: Discounting Case 18 Introduction Existing Situation and Challenges Internet is only accessible to users who can afford to buy bundles and regular subscriptions. Since it comes with higher costs to the lower socio-economic classes requiring support from the government, a social welfare program is inevitable. Development of a free internet project will bring all the people into a similar communication platform and reduce social inequalities (Fabian et al. 2011). The cost benefit analysis of free Wi-Fi for city residence and public transport will involve costs (physical installation and up-grading) and benefits (dissemination of information, mobility and cost of ownership). This will require use of discounting rates. Components: Expansion to include inner city and suburban areas Purchase of servers and routers Recruitment of system administrators Devices on data security and signal strength Uninterrupted power supply systems Smart-phones and laptops Objectives 1. To allow free access of data to 70% of the people using laptops and phones in offices and public transport in the next two months 2. Increase effectiveness of communication to 80% among people in the next two months. 3. To increase data transfer speed by 98% in the next two months. The alternatives Alternative 1: The first alternative is to ‘do nothing’, ‘base case’ or ‘without project’. This is an important alternative since it determines the incremental costs of the free Wi-Fi project at early stages without a clear viability and sustainability. This option is not viable since it would not benefit many people as expected. Alternative 2: Purchase of data bundles from major Internet Service Providers. This option is feasible and real, though many ISPs have increased their cost of data. The data is only accessible at certain points and areas which is inconveniencing to those intending to communicate or undertake research. This option is not taken since it considers people who can afford to purchase bundles (Haezendonck, 2008). Alternative 3: Organizational Intranet. This option limits costs to the organization and regulates users depending on the need. The benefits are increased data transfer, increased uptime and close monitoring by the IT department. Intranet is only found in organizations hence locking out many city residents and public commuters. The constraints (Assumptions) Limited finances to fund entire city distribution of Free Wi-Fi Collision or disruption with other wireless Internet Service Provider signals Poor signal strength Regular change of Passwords Limited access of adult sites and unauthorized websites The problem: Market Failure and Externalities The government is anticipated to have least interference with the private sector and provision of services to its citizens. More often, the government learns the inability of a large section of its population to access basic services such as education and communication. In the light of this, families are not able to provide enough resources to sustain education and social welfare to its members. Provision of free Wi-Fi by the government to city residents is an indication of a market failure to address income inequalities and socioeconomic differences among people (Fuguitt & Willcox, 2009). The private sector will be affected by this plan undertaken by the city government. The costs include: lose of business by the private sector (cyber cafe owners) and the socioeconomic costs of bringing up unproductive work force (spends too much time on social media). The benefits are expected to outweigh costs as the local population enjoys free internet (Layard et al. 2004). Project Log-frame (See Appendices) Impact Chart Identifying costs and benefits The Wi-Fi stakeholders The Wi-Fi Stakeholders are all the significant groups directly or indirectly benefiting from the service. Their point of view is the level of their interest in the Wi-Fi use. Project Planning Balance Sheet Costs and benefits of Wi-Fi Participant group Costs Benefits Commuters High radiation High internet accessibility Public transport Increase in people using the service due to availability of Wi-Fi. Colleges Reduced congestion at libraries Increased performance and better research findings Professionals Reduced cost of spending at cyber Increase access to information from the internet easily at any time IT technical providers/operator High signal sensitivity Profits from and more work of signal sensing Local business Increase in demand for laptops and smart phones Profits from sale of laptops and smart phones. City Government Resources for expansion of complementary infrastructure Revenue from taxation of distribution of smart phones and laptops The costs Identification The Wi-Fi network will be very convenient cheap and easily accessible by the users every where within the city centre and suburban areas. This will however boost the smart phones owners and user in getting information in any of their locality in the town centre (Gillett, 2006). IT experts’ involvement in the network distribution will help in facilitating proper signal reception. The benefits of free Wi-Fi project Reduces costs of internet access by its users Increase in purchase of smart phones and laptops. Internet connectivity to city residents and passengers Increased access to websites, social sites and Android phones Mobility Speed and simplicity Cost of ownership Economic versus Financial Impacts Identify Financial and Economic Costs These are monetary payments paid to meet financial costs by the project owners. This includes money paid to internet service providers and licensing. Economic costs or opportunity costs are real resources used up by the free Wi-Fi project not available for alternative use (Crandall et al. 2007). They include: Routers and servers (financial & economic) Data cables (financial & economic) Labour (financial & economic) Licensing fees (financial & economic) Administrative costs (financial & economic) Upgrading costs (financial & economic) Network congestion (economic) Los of employment to cyber owners (economic) Financial and Economic Benefits These are monetary payments for outputs or financial benefits paid by the project recipients. Economic benefits are real resources that are created by the project and are demanded with a willingness to pay (Campbell, 2007). These include: Increased communication through social media (socio-economic) Increased data transfer (economic) Increased literacy levels (economic) Increased profit among public service transport providers (financial & economic) Financial versus economic impacts of free Wi-Fi project Impact Financial (money) Economic (real) Benefits Data transfer $ per Mbs Increased users Social communication $ savings on airtime Increased trade Literacy levels $ savings Competitive edge (Reduced Research costs) Costs Labour Wages Time consumed Equipments Market price money inflation Subscription cost Internet service providers cheap access to network (Market prices) (Subscription Payments) Discount Rate Selection The free Wi-Fi project discount rate is based on Net Present Value and Internal Rate of Return for the next ten years from 2014-2023. The discounting rate applied is 10%. The project’s expected life is assumed ten years because the introduction of free Wi-Fi capable of transmitting 1million Mbs per day likely to have social, economic and financial impacts felt in the next ten years. Any analysis after this point would be very difficult to predict. Estimation of Net Present Value (NPV) is the difference between each year’s costs and benefits summed over the life of the project and adjusted for the discount rate. This adjustment involves multiplying a discount factor with each year’s cost, benefit or net benefit (Dutz et al. 2009). The discount factor depends on the discount rate selected and the length of time away from the initial project year. In order to calculate NPV, the project identified and valued both benefits and costs for each year of the project's life. Determining Values Costs and benefits were identified in the Distributional Incidence Table (Planning Balance Sheet). The cost of buying smart phones and laptops or PCs rests with users. However, the company will incur ongoing costs of Wi-Fi networking. Benefits i) Mobility Users need real time information whether in offices, homes and travelling. Many LAN users apply wireless LAN systems to access this information (Haezendonck, 2008). Mobility will be important given that users will enjoy service and productivity opportunities that could not be provided with wired networks. Valuation technique: The number of people accessing the network multiplied by the work hours and flexibility factor. The work hours will be determined by the time saved. It will be estimated that each hour costs $10 and the flexibility factor will be 0.4. In 2014, the Free Wi-Fi project targets 18,000 users daily saving 4 hours per day. Value: PV 2014$ 48,750 ii) Speed and Simplicity There is faster and easier installation of wireless LAN systems. When the delays resulting from the need to pull cables through ceilings and walls will be eliminated, much of installation costs will have been reduced. Valuation technique: Cost savings will be the technique used to value speed and simplicity. The amount of money saved will include the cost of labour, installation equipment and wiring (Campbell, 2007). The bill of quantities will be used to determine the costs saved. Value: PV 2014 $ 115,000 iii) Cost of Ownership The cost of wired LAN hardware is lower than the initial investment required for LAN hardware. This makes life-cycle costs and overall installation expenses lower (Florio, 2014). In dynamic environments demanding frequent changes and moves, long term benefits are greatest. Valuation technique: NPV The valuation technique of Net Present Value (NPV) is determined by establishing the Present Value on discounted rates for the next five years. The life-cycle costs and installation expenses are discounted and found to be lower than the initial investment (Campbell, 2007). Negative NPV will be considered appropriate as the costs are reducing with time. Value: PV 2014 $ 36,000 Free Wi-Fi impact in public transport and city residents$‘000’ Mobility 48.75 Speed and Simplicity 115 Cost of Ownership 36 Total 199.75 Costs i) Installation Costs and Upgrading Networking hardware is required to meet the standards of Power-Over-Ethernet. To hook up access points, Ethernet cable will necessary. Valuation technique: Market prices The cost of procuring an Ethernet cable will be estimated including the cost of labour through hiring qualified installation specialists. Estimates of costs of the Free Wi-Fi internet to city residents and public transport users ($ ‘000’in June 2014 dollars) Item Year of expense Total 2014 2015 2016 2017 2018 Upgrading 1.5 0.0 4.5 0.0 2.1 8.1 More Bandwidth 0.0 0.5 2.0 2.0 0.0 4.5 Training 0.0 0.5 0.7 0.0 4.0 5.2 Personnel 2.0 1.0 1.5 0.0 - 4.5 In-house tech support 1.0 0.3 2.0 1.5 - 4.8 Cloud based offsite network 0.0 1.3 2.1 0.0 - 3.4 Consultation 0.2 0.0 0.1 0.0 - 0.3 Physical Installation (Ethernet cable) 3.2 0.0 - - - 3.2 Data security and protection 0.1 0.2 - 1.0 - 1.3 Server administration 0.2 - 3.1 - - 3.3 Purchase of Routers 1.1 - - - - 1.1 Design 1.8 - - - - 1.8 Contingency 0.5 0.3 1.5 1.6 - 3.9 Total 11.6 4.1 17.5 6.1 6.1 45.4 Value: Present value in $ 2014 is $23 000. Cost Benefit Analysis of Free Wi-Fi for city residents and commuters $’000’ Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Benefits Mobility 0.2 0.4 0.6 1.0 1.7 2.8 3.5 4.6 4.9 5.7 Speed/simplicity 0.1 0.5 0.7 1.0 1.8 2.3 2.5 3.4 5.5 7.1 Cost of ownership 3.0 3.5 3.8 4.0 6.3 6.5 6.8 7.6 8.6 8.8 Total benefits 3.3 4.4 5.1 6.0 9.8 11.6 12.8 15.6 19.0 21.6 Costs Upgrades 1.5 0.0 4.5 0.0 2.1 - 2.0 0.0 2.3 4.0 Physical Installations 10.1 4.1 13.0 6.1 4.0 - 0.0 0.0 1.5 0.0 Total Costs 11.6 4.1 17.5 6.1 6.1 - 2.0 0.0 3.8 4.0 Net Benefit -8.3 0.3 -12.4 -0.1 3.7 11.6 10.8 15.6 15.2 17.6 IRR=0.574 NB: Discounting rate is 10% for 10 years Total NPV$ ‘000’ Net Benefit Mobility Speed/simplicity Cost of ownership Total Costs Total benefits 54.0 48.75 115 36 45.4 199.75 An illustration of the figures is as shown in the figure below. Figure 1: CBA of Free Wi-Fi for city residents and public transport Distribution and Sensitivity Analysis Sensitivity analysis involved identification of high and low values of crucial assumptions. Each of these values NPV when rework assumes the crucial assumptions in the project design. The crucial variables of the Wi-Fi project being the amount of Data transfer, literacy levels and level of social communication makes use of the risk or uncertainty the project faces. Physical installation and subscription fees are risks that may be large enough to change the conclusions of the Cost-Benefits Analysis. Data transfer and social communication becomes the largest variables dependent on user speed and favourite search sites (Turner, 2007). Projecting on benefits on literacy levels, mobility and cost of ownership as still typically very uncertain, hence, selected for sensitivity analysis. In this case, sensitivity analysis is presented by taking the optimistic and pessimistic views of the variable and by recalculating the decision criteria using NPV. For the Free Wi-Fi project a pessimistic view of increased browsing hours by 4hrs which reduces works productivity by 4hours per day. An optimistic view could be that the company saves through organizational communication costs minimization. The impact can be shown in a table. Social communication and organization savings Present Value (PV) in $ ‘000’ in 2014 NPV Base case: $4/hr communication costs 115 104 Pessimistic: 4hr/day loss in work productivity 90 81 Optimistic: $10/day savings in internet bundles 145 131 Another way to present sensitivity analysis is to calculate the switching value. This is the value of the selected variable which would change the decision. In the case of the third runway it would be the aircraft and passenger delay which drove the NPV down to zero. Because the noise reduction benefit is already larger than the total cost, the delay would have to decrease after the project in order for the NPV to be zero. The project is not very robust according to sensitivity analyses, but can accommodate small negative changes which are worthwhile (Turner, 2007). The project has positive net benefit which is very reliable. In distributional analysis, the Wi-Fi project identified the stakeholders, described and valued the benefits and costs experienced. A Planning Balance Sheet as detailed in a table above is a critical tool in establishing the major beneficiaries (city residents and public transport commuters) as enjoying effective social communication platform. Internet Service Providers will carry major cost in providing the signal and installation fees. The city government will be responsible for most of the costs meant to improve the social welfare of the city residents (Florio, 2014). The Local Area Network service providers will lose business in the communication industry but will require changing tack or providing other related services such as selling cables, smart-phones and laptops. The local city residents and commuters will enjoy free internet at every point of their work schedules, travels and leisure (Lucas, 2008). The aspect of unauthorized data access and hacking will be a cost to the city government as it tries to minimize cyber crime and access to adult sites. Cyber owners will bear the highest loss for they will register few people coming in to browse per day. They will likely close their businesses. Conclusion The cost of accessing information has been expensive in the print and electronic media which require regular subscriptions. Many city residents especially college students do not afford such subscriptions. Professionals in various fields also find it difficult to communicate official matters outside their office environment. By providing free Wi-Fi to public commuters and city residents, the sponsor will engender a literate community and enhance communication (Campbell, 2007). The project is sustainable as the government takes up this project as a social welfare initiative financed through the exchequer. Reference list Campbell, H. F. (2007). Benefit-Cost Analysis: Financial and Economic Appraisal Using Spreadsheets. Cambridge University Press. Crandall, R., Lehr, W., & Litan, R. (2007). The Effects of Broadband Deployment on Output and Employment: A Cross-sectional Analysis of U.S. Data, 20 pp. Dutz, M., Orszag, J., & Willig, R. (2009). The Substantial Consumer Benefits of Broadband Connectivity for U.S. Households, Internet Innovation Alliance, p. 4, Fabian, B., Gunther, O., Ivantysynova, L. & Ziekow, H. (2011). RFID and the Internet of Things: Technology, Applications, and Security Challenges. Now Publishers Inc. Florio, M. (2014). Applied Welfare Economics: Cost-Benefit Analysis of Projects and Policies. Routledge. Fuguitt, D & Wilcox, S.J. (2009). Cost-benefit Analysis for Public Sector Decision Makers. Greenwood Publishing Group. Gillett, S. E., (2006). Massachusetts Institute of Technology, Measuring Broadband’s Economic Impact, report prepared for the Economic Development Administration, U.S. Department of Commerce, February 28, 2006, p. 4. Haezendonck, E. (2008). Transport Project Evaluation: Extending the Social Cost-benefit Approach. Edward Elgar Publishing. International Chamber of Commerce, (2012). The Freedom of expression and the Free flow of Information on the Internet. Document number 373/510. Pp1-5. Layard, R.G., Layard, R. & Glaister, S. (2004). Cost-Benefit Analysis. Cambridge University Press. Lucas, H.C. (2008). Inside the Future: Surviving the Technology Revolution: Surviving the Technology Revolution. ABC-CLIO. OECD, (2002). Directorate for Science, Technology and Industry, Broadband Infrastructure Deployment: The Role of Government Assistance, pp. 42. Turner, Derek S. (2007). Shooting the Messenger Myth vs. Reality: U.S. Broadband Policy and International Broadband Rankings, 25 pp. Free Press. APPENDICES Appendix I: Project Log frame Log-frame: Free Wi-Fi on city and Public Transport Narrative Summary Measurable Indicators Means of Verification Important Assumptions Goal: (sector or program objective) 1. Increase internet technology among youth and professional 2. Increase level of information access among young people 3. Improve literacy rates through technology and innovation 1. Data transfer rate per second 2. Number of Android and mobile phones that are Wi-Fi enabled 3. Available broad-band width 4 Number of Users per day 1. Cost Benefit Analysis. 2. Impact Analysis 3. Traffic sites records on websites Attainment of international standards on technology and education Purpose: (aim or impact) Increased access to data and information among youth and professionals Connect communities and villages to the internet End of Project Status Lower high cost of accessing internet Increase connectivity among mobile phone users and those on laptops Internet uptake interviews and questionnaires Impact reports Purpose to Goal More phones and laptops enabling Wi-Fi will be bought including Android and 3G Outputs: (deliverables or terms of reference) 1 .Internet connectivity to city residents and passengers 2 Increased access to websites, social sites and Android phones Basic terms of reference for each output Connectivity of more than 10MBs Universal Wi-Fi internet adapter using a net gear Connecting and discovering peers; transferring data Wi-Fi internet tracking reports Output to Purpose 1. Pricing based on bundles bought and used 2. Access based on user administration rights 3 Compliance to local laws and values Activities: ( work breakdown structure or key clusters) 1. Listing user requirements 2. Determine usage rates 3. Install routers and linkages 4 .Create user log ins 5. Determine usage needs in public transport 6. Establish traffic and connectivity Inputs: (Budget, users, computers, routers, cost) System administrators, laptops and iPads. Installations in all public transport mediums System administration reports Stakeholder reports Channel security reports Activities to Output Number of public vehicles determined User needs of Wi-fi established on the number of Android phones The acceptance by the transport union to server efficiency Excellent server uptime of 98% Appendix II: Discounting Case A hypothetical case of the Free Wi-Fi project assumes project life of 10 years; at a discounting rate is 10% for established costs and benefits. 2014 $ estimates in ‘000’ Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Total Total cost 115 87 63 110 40 40 40 40 30 30 595 Total Benefits 10 85 85 110 115 120 135 135 170 175 1,140 Net Benefits -105 -2 22 0 75 80 95 95 140 145 545 Discount factor 1 0.9091 0.8264 0.7513 0.683 0.6209 0.5645 0.5132 0.4665 0.4241   NPV -105 -2 18 0 51 50 54 49 65 61 241 In an Excel spreadsheet, calculating present values makes use of the formula =NPV (10%, E10:E09) given that the discount rate (10% in this case) and the value range of the discount rate between 2014 to 2023. 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