Cost-Benefit Analysis

A building manager has noticed an inordinate level of employee trafficespecially during the morningout of the building. So she followed the crowd one day and found many were headed to get coffee at a local shop. The manager timed the round-trip at 15 minutes, partly because of the backups at the security checkpoints and the elevators. She was concerned about the backup at the checkpoints because the security service staffs 2 extra guards at the main entrance and 1 extra guard at the alternate entrance for the morning peak, which the manager figured lasted an extra hour (9:30 to 10:30) due to the coffee break traffic. Peak periods are covered 250 days per year. Security guards are contracted at $18 per hour.

So the manager did a little research and located a vendor who would operate a canteen within the building. The space identified for the proposed canteen was used for storage. She estimated it would take approximately 100 hours at a labor rate of $20 per hour to box, load, and unload the files stored there and 40 hours at a labor rate of $50 per hour to inventory the files, plus use of a government-owned vehicle traveling 200 miles, charging at a rate of $.55 per mile. The records warehouse charges $12 per square foot annual storage. Assume that the boxed and stacked files will take up half as much space as the 1000 sq. ft. they do now.

The vendor would pay rent of $15 per square foot annually for the 800 sq. ft. they could use in return for the franchise (about 500 people work in the building), but improvements would be required to make it usable. Reconstruction would delay the opening of the canteen by 6 months after the space was cleared, and was projected to cost $50 per sq. ft. (for the canteen space only). The incremental utility cost of the canteen is estimated at $400 per monthfurnished free of charge to the vendor.

The term of the project is 5 years, which starts with the initial expenditures (i.e., as soon as the boxes start being inventoried and moved). The assumed rate of escalation is 2 percent and the discount rate is 4 percent.

Instructions

1. Read the case
2. Identify the one-time costs
3. Identify recurring costs
4. Identify recurring benefits