Investment Planning -
NPV and Benefit template procedure
Procedure #
Description:
Provides instruction on how to use the NPV – Benefit calculation template
Overview
Objective
To ensure the NPV and Benefit calculation template is used in a consistent manner.
Roles, Responsibility and Authority
Role
Business Case Author
Asset Manager
Responsibility
To follow the procedure outlined
Ensure that the Business Case
author follows the procedure
outlined
Authority
Procedure details
Background
This template was developed to support Asset Managers and Investment planners in assessing solution
options within Business Cases. It includes a Net Present Value (NPV) calculation module and an Option
Benefits Evaluation module.
The Option Benefits Evaluation process follows the same principles and methodology used during the
Project Prioritization and Selection stage of the Investment Planning Framework. It provides an objective
means of selecting the Business Cases' best option consistent with the priorities set up by the City's Senior
Leadership Team.
The following equation describes how benefit scores are calculated:
Document
Revision No.
1.1
1.2
Revisions
Removed Benefit criteria table, Revised instructions on
scoring benefits for each Solution options, Revised this
doc quality table
Added detail related Summary Tab - graphic
description
Date Released
Released By:
February, 2014
Ron Amann
March, 2014
Ron Amann
Investment Planning -
NPV and Benefit template procedure
The 10 benefit criteria and their weightings are:
NPV Template Overview
This template includes four different tabs identified by their colors:
 The Green summary tab contains general information about the project and the results of the NPV
Options Analysis. This information gets copied into section 3 of the Business Case.
 The Red tab allows the user to determine the NPV of up to four options under consideration the
Business Case.
 The Blue tab will be used when a comprehensive Options Benefit Assessment is required.
Summary Tab
Use this worksheet to enter the general information that identifies each options being assessed. Upon
completion of the assessment, the information on this sheet is copied and pasted into Part 3: Option
evaluation section of the Business Cases.
 Project Name: use the project name as it appears in the Business Case - Part 1
 Base Year: this is "Year 0" for the calculation of the Project's NPV. Base Year should be the year
for which the next capital budget is being prepared (i.e. 2015 for a Business Case prepared in 2014)
 Discount Rate: Provided by Corporate. The discount rate represents the City's borrowing cost.
Therefore, the cost of capital in the future years should be adjusted to reflect the actual cost in the
year that capital is estimated to be spent. The discount rate does not include escalation costs which
have to be included in the cash flow (see sub-section “For capital costs, the number must include”
below).
 Options: Provide a Title to designate each Option being assessed. This title is automatically
transferred to the corresponding worksheet.
 Other cells in the Table are automatically generated
 NPV Capex: Amount calculated from the NPV Option worksheet for that option
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Investment Planning -
NPV and Benefit template procedure
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NPV Opex: Amount calculated from the NPV Option worksheet for that option
NPV: Total of the Capex and Opex NPV
Life-cycle Benefit Score: The benefits score from the Benefit worksheet for that option
Benefit Score adjusted for Program: The worksheet will adjust the benefit score for the number
of projects within a program. Note; for NPV-Benefit analysis programs do not typically get
assessed.
 Cost/Benefit: Divides the NPV by the life-cycle benefit score. Lower is better!!
Option Comparison Graphic
The key elements are:
 Bubbles and bubble color; designates a Cost/Benefit ratio for a specific option.
 Bubble size: graphically scales the C/B ratio between options. The lower the C/B ratio the smaller
the bubble
NPV (Net Present Value) Options
The Net Present Value of up to four options are calculated in the NPV Options 1 to NPV Options 4
worksheets. The calculation is broken down into Capex (capital expenditures) and Opex (operational
expenditures). To complete the NPV calculation, the following information is required:
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Type: choose one option from the list that best describes the investment item. The Capex options
are: Pre-construction, Construction, Decommission, and Capex Benefits. A Capex Benefit generally
relates to the sale of an asset, such as the sale of land for example. The Opex options are: Operate,
Maintain, and Opex Benefits. Incorporate only the items for which the annual operating expenditures
will vary as a result of the investment (i.e. net cost or net saving on operating cost). An Opex Benefit
relates to all the potential operating benefits as a result of the investment, such as new revenue
generation activity (e.g. sale of excess electricity from solar panels on a new building), etc.
Description: provide a brief description of the Capex or Opex item.
Total NPV: the NPV will be automatically calculated based on the cash flow information provided
in the next columns.
Cash Flow: provide the cash flows for each of the next 30 years.
For Capital Cost, the number must include:
1. Cost for the product (i.e. the amount required to address the Need)
2. Construction Escalation Costs as appropriate for the industry and compounded every year (e.g. if the
annual escalation cost is 2% and the cost of construction in 2014 is $1000, the cost of construction
would be $1020 in 2015, $1040.4 in 2016, $1061.2 in 2016, $1082.4 in 2017, etc.)
3. Any other cost as appropriate and determined by the Business Unit
For Operating Cost, the number must include:
4. The Net Increase (or Decrease) in operating costs as a result of the investment (e.g. if the current
operating cost of the asset is $1000, and the operating cost of the new asset is $1100, the net increase
in operating cost should be $100)
5. Operating Escalation cost as determined by the Business Unit (e.g. if the net increase in operating
cost is $100 in 2014 and the operating escalation cost is 3%, the net increase in operating cost would
be $103 in 2015, $106.1 in 2016, $109.3 in 2017, etc.)
Benefits
Use the Benefits sheet to evaluate the benefits of each option under consideration for a project.
Step 1: Describe the Options
For each Option, start by filling the "General" columns:
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NPV and Benefit template procedure
Type: Choose between Interim Solution and Final Solution. In most cases, only one solution (i.e.
one type of investment) is made to achieve the Business Unit objective. In some cases, a Business
Unit might want to consider a temporary, cheaper solution as an interim solution to address the most
urgent needs and delay the large investment required for a final and complete solution. The benefits
from a smaller, temporary solution will likely be lower that the benefits from a complete and
comprehensive solution that addresses all the needs.
Description: provide a brief summary of each stage of the solution (temporary or final) for the
option.
Year of Completion: identify when the benefits for each solution will start to be applicable. If the
project takes more than one year to complete, use the completion year. For example, the benefits
from the temporary solution may be applicable in year one, while the benefits for the final solution
will be applicable in Year 5 upon completion of the project. A solution with immediate benefits will
score higher than the same solution with a later investment. For benefits to be applied, the Year of
completion of the solution has to be the same or later than the base Year as indicated in the
Summary worksheet.
Investment Type: choose between the two types of investments: Project or Program
Number of Projects included in Program: put the number of projects included in the program. For
linear asset projects, it may be difficult to know the number of Projects included in the Program. In
that case, estimate the number of projects you will/could do for the investment amount requested.
Option Total NPV ($k): the option NPV will be automatically filled in based on the information
provided in the NPV Options section.
Step 2: Assess the Benefits of the Options
Step 2 requires the use of the “Benefit Evaluation Sheet” that is located in the Benefit Evaluation Criteria
procedure. The benefit criteria descriptions in this procedure help identify the type and extent of benefits
applicable to each option being assessed for each solution.
Benefit assessment must be performed for all (any interim and final) solutions for each option. The
Lifecycle Benefit Score totals all solutions. Note: if an interim solution is implemented, the benefits achieved
with the interim solution should not be counted twice when evaluating the benefits achieved with the final
solutions. That is, the starting point to rate a final solution should be after the interim solution has been
implemented. For example, if an interim solution reduces the risk exposure from VHVH to MM, the final
solution will reduce the risk exposure from MM to VLVL (and not from VHVH to VLVL).
For each option evaluate the proposed investment relative to each of the primary benefit criteria. More than
one consequence category within the primary benefit criteria could be applicable (i.e. Maintain Essential
LOS have categories of Legislative Compliance, Health and Safety, and Environmental consequence). Use
the category in which the greatest rating is achieved within each criteria and document this selection in the
“Category” column.
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Maintain LOS (Essential - Quality - Image) "From": Evaluate the risk exposure in terms of
Consequence and Likelihood at the time before the investment is made. Use the Evaluation sheet to
help you assess the current situation.
Maintain LOS (Essential - Quality - Image) "To": Using the same benefit category as above,
evaluate the risk exposure in terms of Consequence and Likelihood after the investment has been
made.
Enhance LOS (Quality, Image), Compliance with New Legislation, Support Growth and
Development, Environmental Stewardship, Operational Efficiency, Cultural: Assess the
benefits anticipated from making the required investment.
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Investment Planning -
NPV and Benefit template procedure
If a benefit criterion is not applicable to the project, leave the evaluation "blank" in the appropriate column.
All benefits will not be applicable to each project but hopefully each solution has at least 1 applicable
benefit.
Step 3: Evaluate Uptakes and Alignment
Benefit Uptake
Some benefits are proportional to an asset's user base. Evaluate the anticipated benefit uptake from the
proposed solution.
 Benefit Uptake: is a function of Coverage (who and how many people will be impacted by the
proposed solution?).
 Strategic Importance: (how important is the project to the City and its residents?)
 Locational Criticality: (the type of routes or facility impacted by the solution).
Alignment Factors
These bonuses may be applied to a solution if applicable:
Life-cycle bonus: The proposed solution provides the best whole life value
Coordination Bonus: the proposed solution allows for coordination with other projects resulting in costs
savings and efficiency for the City
Cost of Deferral Bonus: Additional costs will be incurred to the project if the investment is delayed.
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Investment Planning -
NPV and Benefit template procedure
Benefit Score
Total Benefits: this is a calculated value that summarizes the benefit score for each solution
Life-cycle Benefit Score: this is a calculated value that is linked to the summary tab
Benefit Score adjusted for Program: this is a calculated value that is linked to the summary tab
References and/or Resources
Title
Description
Document Location
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