Fillable Printable Cost Benefit Analysis Example
Fillable Printable Cost Benefit Analysis Example
Cost Benefit Analysis Example
Tutorial
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Cost/Benefit Calculations
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Week 5
Hotel Example: ROI Analysis
pg. 1
The ROI Analysis needs to be done on all design options considered in a Feasibility
Study.
Option 1: Stay with Current System
Background Information
Note: For this hypothetical example we have made up reasonable background numbers
in order to perform the analysis. However, for your assignment, you should try and get
as much of this information as possible from the real organization, (it’s probably easier
to ask simple questions than to try and make up reasonable numbers anyw ay).
Current Information - some facts
Discount rate: Here we use the discount rate from the lecture notes: 12%
Reminder: Present_value(n) = 1/(1 + i)^n where n = year, i = 0.12
Lifetime of System: 6 years
Definition: Hotel Customer: The occupants of a room are together considered
as one “customer”.
Error Frequency: On average one in every five customer checkouts results in a billing
error.
§ Half of these errors are over-billing errors, and we always assume
that the hotel is honest and returns all over-billed money to the
customers.
§ Half of these errors are under-billing errors, and we always assume
that the hotel does not pursue customers to correct under-billing
errors, as the damage in customer satisfaction and hotel employee
work load is not worth the potential money recovered.
Average Amount of Billing Error: $20 per customer
Current Number of Rooms in the Hotel: 50
Average Occupancy Rate: 60%
Check-ins/Check-outs: Each day 1/3 of customers check in, 1/3 of customers check out
and 1/3 of customers remain unchanged.
Average Customer Charges (Room Cost + Extras) per Day: $100
Customer Loyalty Loss Due to Over-billing: Let’s assume that the occupancy rate of the
hotel would actually be 65% were it not for the loss of return
customers due to overbilling.
Average Hotel Employee Wage: $15/hour
Tutorial
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Cost/Benefit Calculations
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Week 5
Hotel Example: ROI Analysis
pg. 2
Average Time to Perform One Update: 2 hours
Updates per Day: 2
Expansion in Year 2
We assume that the hotel expansion corresponds with some sort of beneficial event,
like a new tourist attraction, which would result in the occupancy rate remaining at 60%,
even though the number of rooms are doubled (effectively the number of customers is
then doubled by this new event).
New Number of Rooms: 100
Occupancy Rate: 60%
Average Time to Perform One Update: 4 hours
All other information remains the same.
Cost/Benefit Calculations
Current Situation
Average Billing
Error/Customer:
$20 per customer/(1 in every 5 customers) = $2/customer
Average Number of Rooms
Occupied per Day:
60% of 50 Rooms = 30 customers
Average Number of
Checkouts per Day:
1/3 of 30 customers check out = 10 checkouts
Average Loss in Under-
billing Errors Per Day:
10 checkouts * Average Billing Error/Customer $2 = $20
Yearly Loss from Under-
billing Errors:
$20 * 365 = $7,300
Employee Costs of
Updates per year:
2hrs/update * 2 updates per day * $15/hr wage *365 days
= $21,900
Daily Costs of Over-billing:
Loss of 5% in occupancy * 50 rooms * $100 average room
cost = $250
Yearly Costs of Over-
billing:
$250 * 365 = $91,250
Total Yearly Current Costs
of Current System:
$7,300 + $21,900 + $91,250 = $120,450
Tutorial
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Cost/Benefit Calculations
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Week 5
Hotel Example: ROI Analysis
pg. 3
Expansion in Year 2
The number of rooms is doubled but the occupancy rate remains the same, thus
average number of customers per day is doubled. Therefore the yearly loss from
underbilling errors, and the daily cost of over-billing is simply doubled (conveniently). As
the number of customers doubles, the time to perform updates doubles, therefore the
Employee Costs of Updates per Year also doubles.
Yearly Loss from Under-billing:
$14,600
Yearly Loss from Over-billing: $182,500
Employee Costs of Updates per Year:
$43,800
Total Yearly Costs of Expanded System:
Using this information now calculate:
1. Net Present Value
2. Payback Period
3. ROI
Tutorial
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Cost/Benefit Calculations
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Week 5
Hotel Example: ROI Analysis
pg. 4
Option 2: Deploy New Automated System
For this option we are assuming the purchase of a customizable software system.
Background Information and Cost/Benefit Calculations
Two Separate Interconnected Systems:
Restaurant System:
Upfront Costs
Hardware and Software Costs:
$3,000
Upfront Customization Costs:
5 hours at $50/hour = $250
Training Costs for Hotel Employees: 5 hours of training * $15/hour = $75
Training Costs for Trainer:
5 hours of training * $50/hour = $250
Total Restaurant System Development Costs =
$3,575
Maintenance Costs per Year
Software Content Changes: average 1 hr/week * $50/hr * 52 weeks = $2,600
Front Desk/Management System
Upfront Costs
Hardware and Networking Costs (backup
system included): $20,000
Software: $150,000
Software Customization:
$50,000
Pay TV Software Module Acquisition:
$5,000
Hotel Staff Training Costs: 50 hours * $15/hour = $750
Trainer Costs:
50 hours * $50/hour = $2,500
Total Front Desk/Management System
Development Costs:
$228,250
Maintenance Costs per Year
Part-time Maintenance Person
who does backups, training:
average 5 hrs/week * $50/hr * 52 weeks = $13,000
Software Changes: average1hr/week * $100/hour * 52 weeks = $5,200
Total Yearly Maintenance Costs:
$5,200 + $13,000 = $18,200
Totals
Total System Development Costs $228,250 + $3,575 = $231,825
Total Yearly Maintenance Costs
$18,200 + $2,600 = $20,800
Tutorial
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Cost/Benefit Calculations
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Week 5
Hotel Example: ROI Analysis
pg. 5
Benefits
The benefits of the new system are equal to the costs of the old system, as the new
system will correct all billing errors and eliminate the time needed to do manual
updates.
Expansion in Year Two
As the system is designed to be (or purchased to be) completely expandable, there
are no extra costs incurred during the Hotel expansion in year 2.
Using this information now calculate:
1. Net Present Value
2. Payback Period
3. ROI
