Advancing Statewide Spatial Data Infrastructures in Support of the
National Spatial Data Infrastructure (NSDI)
_______________________________________________________
USGS Contract #: 08HQCN0024 May 2009 Page 2 of 5
Applied Geographics, Inc.
Intangible benefits and costs are very
relevant to an overall determination of
what is a good investment for the public
well-being. SSDI implementation
includes both types, and is therefore a
candidate for applying CBA, if the
expertise and resources are available to
support the effort. There are a number
of economic methodologies for
monetizing benefits and costs that do
not have easily discovered market
prices, but these can be complex and
any estimate derived from them may
have relatively high uncertainty.
Like an ROI calculation, the result of
CBA is a ratio expressed as a
percentage, and economic
attractiveness is determined the same
way: above zero is attractive, and
below zero is not. The equation is the
same, although more costs and benefits
are included. That is the essential
difference between the two methods.
Effect of Time on ROI and CBA
Calculations
In most cases, executives and elected
officials expect to see an economic
justification based on phased benefits
and costs over a three to five year
window. Being able to show a positive
ROI in a one or two year timeframe will
probably make your project an instant
hit, but this is an unusual circumstance.
Given the time value of money, a dollar
is worth more today than it will be
tomorrow. To account for this economic
fact, future costs and benefits need to
be “discounted” in order to calculate
today’s value (a.k.a., Net Present Value,
or NPV). The discount factor, also
known as the cost of capital, might be
specified by various state authorities,
and usually reflects the interest rate the
state pays to borrow money when it
issues general obligation bonds. By
comparison, the federal Office of
Management and Budget (OMB)
recommends the following nominal
discount rates for federal programs,
depending on the length of the program.
Duration 3 Yrs 5 Yrs 7 Yrs 10
Yrs
Discount
Rate
2.7% 3.3% 3.7% 4.2%
Source: OMB Circular A-94 Appendix
C, as of 12/12/08
In the parcel mapping calculation of
ROI, to apply a discount factor to
determine the Net Present Value (NPV)
of a future stream of benefits and costs,
the following equation and factors would
be used:
B = Benefits; C = Costs; r = discount
rate; t = time period; n = number of time
periods.
NPV equals the summation from t = 0
(the initial start-up of the program) to t =
n (the final year of the program) of [(B
t
-
C
t
) / (1 + r)
t
].
For a 3 year program, the equation
would be as follows:
NPV = [(B
0
- C
0
)] + [(B
1
– C
1
) / (1 + r)] +
[(B
2
– C
2
) / (1 + r)
2
] + [(B
3
– C
3
) / (1 + r)
3
]
In the table on the parcel mapping
example, the above equation was
applied, and the resulting NPV
calculated out to be $22,120.
The longer the project duration, the
greater the risks due to changes in work
process flow and other external factors
that may lead to a new project design
and additional costs.