Business Case Cost-Benefit Worksheet

Note: At present, these worksheets are available for energy and water projects.

Life cycle cost analysis (LCCA) is a method for assessing the total cost of facility ownership. It takes into account all costs of acquiring, owning, and disposing of a building or building system. LCCA is especially useful when project alternatives fulfill the same performance requirements but differ with respect to initial costs and operating costs. LCCA allows you compare different alternatives and select the one that maximizes net savings. For example, LCCA can help justify the incorporation of a high-performance HVAC or glazing system, which may increase initial costs but dramatically reduce operating and maintenance costs over time. LCCA is not useful for budget allocation.

A thorough understanding of the life cycle cost implications is essential when considering implementation of an energy-saving project. As well, the relationship between capital costs, operational cost savings, and relevant assumptions must be taken into account when evaluating the business case for a project.

The Roadmap business case worksheet for energy and water projects (download from link above) is a spreadsheet-based tool used to evaluate the life cycle costs of basic retrofits. Users enter information in the white input cells and the result is provided in the purple output cells. The assumptions for the analysis related to escalation and tax rate are highlighted in the yellow cells and can be modified by the user. Here is an overview of the spreadsheet:

Input

Project name: Name of the project

Initial investment: Cost of the initial system or equipment costs, including installation

Implementation costs: Costs related to implementation of the project that are not included in the initial investment

Other initial costs: Additional first costs not included in initial investment and implementation costs

Available incentives: Any available incentives or rebates that would offset first costs

Ongoing support costs: Any ongoing annual support costs

Estimated annual electricity cost savings: Annual estimated electricity savings attributed to the project

Estimated annual natural gas cost savings: Annual estimated natural gas savings attributed to the project

Estimated annual water cost savings: Annual estimated water savings attributed to the project

Operations and maintenance cost savings: Annual savings attributed to operations and maintenance

Additional annual savings: Additional annual savings attributed to the project

Expected project life: The anticipated life of the project, in years, used for life-cycle costs analysis calculations

Cost of capital: The assumed rate for the cost of capital to be used for discounting in life cycle cost analysis calculations

Assumptions

Electricity cost escalation: Estimated annual cost increase of electricity, assumed to be 1.9 percent based on 2010-30 averages from the Energy Information Administration Energy Outlook. This default value can be modified by the user based on available information.

Natural gas cost escalation: Estimated annual cost increase of natural gas, assumed to be 3.2 percent based on 2010-30 averages from the Energy Information Administration Energy Outlook. This default value can be modified by the user based on available information.

Corporate tax rate: Default corporate tax rate assumed to be 33 percent. This value is used for evaluating impact on the bottom line. This default value can be modified by the user based on available information.

Output

Simple payback: Provides the simple payback period of the project; does not consider the time value of money.

Discounted payback: Provides the discounted payback period of the project by considering the time value of money and using the assumed discount rate.

Net present value (NPV): Provides the net present value of the investment by taking into account cash flows, the assumed discount factor, and the project life. Projects with a positive net present value are those that provide a return on investment that is at least equal to the cost of capital over the life of the project. NPV can be used to compare different project alternatives.

Internal rate of return (IRR): Provides the rate of return given stated cash flows for the project. A project with an IRR that is less than the cost of capital, or assumed discount rate, will have a negative NPV. A project with an IRR equal to that of the cost of capital will have an NPV of zero. A project with an IRR greater than the cost of capital will have an NPV of greater than zero. IRR can be used to compare different project alternatives.

Impact on bottom line: Provides the project’s impact on an organization’s bottom line for the first year of the project, given the assumed corporate tax rate and using straight line depreciation.


Home About Topics Drivers Strategies Implementation Resources Terms of Use Privacy Policy Support the RoadmapAmerican Hospital Association | 155 N. Wacker Drive, Suite 400 | Chicago, Illinois 60606 | (312) 422-3000
©2010-2014 by the American Hospital Association. All rights reserved.