Preliminary Benefit-Cost Analysis Report

Introduction

The Federal Emergency Management Authority (FEMA) was tasked by the United States Senate to facilitate the analysis of what the country would save as a result of mitigation of hazards in counties if it issued grants to facilitate mitigation.

Mitigations aim at reducing the severity and losses of occurrence of natural hazards by controlling the factors that cause these natural hazards or by reducing the susceptibility of residents from hazards. In consideration of issuing grants there is need to conduct analysis of the associated benefit that the grant will bring as well as the costs of facilitating the grant. Such analysis is based on comparing the benefits and the costs of such proposals.

Assessment

The benefit-cost analysis entails coming up with the best approaches to alternatives in estimating the associated in maximizing benefits and reducing the costs associated with implementing each alternative. In the case of the grant by FEMA a benefit-cost analysis can be carried out in two different ways.

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As the comparison of discounted costs and discounted future benefits associated with the proposal which means use of the Net Present Value (NPV) as well as use of the benefit–cost ratio. The grant entails; buying of property in flood prone areas with the aim of converting them to integrated green space area and building social amenities.

For conducting the benefit-cost analysis some of the benefits that are to arise after implementation of the grant proposal include;

•  Reducing emergency response costs. Implementation of the grant will see a reduction of the costs associated with responding to emergencies around the flood prone areas in case of flood.
•  Reducing flood insurance costs. Construction of social amenities around flood prone areas, will minimize flood insurance costs as the risk of losing life as a result of floods will be reduced.
•  Reducing public safety risk to flood prone areas. The issue of public safety risk after purchasing property around flood prone areas is to be minimized as the public will not be as likely to visit such areas during the occurrence of a flood.
•  Reducing disaster recovery assistance costs. After occurrences of hazards such as floods there is need to re-build the areas most affected by the flood. Costs associated with such activities are known as disaster recovery assistance costs and are minimized if the risk of affecting the public is reduced by purchasing the property around flood prone areas.
•  Additional amenities for the community. Social amenities such as parking are likely to generate revenue throughout the project’s existence.
•  Total projected benefits over 10 years = $945,000 ($94,500 annual average)

Some costs associated with this proposal include;

•  Property conversion and acquisition costs. These are the costs associated with buying the property as well as converting it to public amenities.
•  Other costs considered are associated with short and long-term maintenance.
•  Total projected costs (initial and maintenance) = $647,000

By comparing the initial assessments total projected benefits and total projected costs, the project initially appears positive. However, further analysis of the Benefit-Cost Ratio (BCR) and Net Present Value (NPV) listed below, suggests the need to re-assess our initial items selected for the associated benefits and costs.

The efficacy of the selected items is called into question; therefore, I would recommend simplifying the initial assessment by breaking down the items into subcategories which may provide additional items which were overlooked, and which also have the potential to negatively impact the overall assessment. Cost reductions may be found in the areas of land and building acquisition and seeding/grading/landscaping. Too much importance was lent to recreational and aesthetic benefits which resulted in inflated associated costs.

Interpretation (Reference Tables Attachment)

Benefit-cost analysis entails the careful examination of costs and benefits in relation to a project and comparing them in order to make an evidence-based decision on whether to undertake the project or not. It is essential in preparing a grant proposal as it acts as a guideline on the expected cash inflows and outflows of a project. The analysis is used in decision making in establishing whether the project to undertake is overall profitable. In benefit-cost analysis the estimation of costs and benefits is important for future and present values associated with costs and benefits. Therefore, it is necessary to discount these costs as well as benefits.

• Based on the benefit-cost ratio (BCR);

1. At 7% the BCR is 0.95 therefore the proposal should be denied as it is less than one.
2. At 5% the BCR is 1.03 therefore the proposal should be accepted as it is more than one.

• Based on the NPV criterion;

1. At 7% the NPV is negative therefore the proposal should be denied.
2. At 5% the NPV is positive therefore the proposal should be accepted.

Therefore, under the 7% discounting rate the proposal should be rejected as the costs outweigh the benefits in both criteria. At the 5% discounting rate the proposal gains more benefits than costs, therefore indicating the proposal should be approved.

Results

In the evaluation of the green space project as a flood mitigation tool, the funding request is not justifiable as the costs outweigh the benefits at a discounting rate of 7% (FEMA standard). By using the benefit cost ratio as well as the net present value they both show that undertaking the project is not beneficial.

At 0.95, the benefit cost ratio is less than 1, hence benefits are outweighed by the costs. The NPV under the 7% discounting rate is negative. This shows that there is no likelihood of gaining profits by undertaking the project.

Sensitivity Analysis and Conclusion

A sensitivity analysis was conducted by using a lower discounting rate of 5%. At this rate, the project generates a positive NPV as well as a BCR ratio greater than 1. Therefore, the project can be undertaken as the benefits outweigh the costs. Using a lower discounting rate leads to a higher present value for the future cashflows hence the change in results on the analysis of the green space project.

The sensitivity analysis highlights the risks associated with the benefit-cost analysis. The grant proposal should rely heavily on evidence-based decision making. Based on the fact that the adoption of the benefit-cost analysis fails to pass at the FEMA standard, I recommend rejecting and excluding the green space project as a flood mitigation tool in the preparation of your grant proposal.