Chandoo Cost Benefit

Doing Cost Benefit Analysis in Excel - a case study » Chandoo.org - L... https://chandoo.
org/wp/cost-benefit-analysis-in-excel/
Last updated: September 2016
Share
Facebook Twitter LinkedIn
Imagine you are the in-charge of finance department at Hogwarts. So one fine day, while you are practicing
the spells, Dumbledore walks in to your office and says, “Our electricity bills are way too high. As the
muggles don’t accept wizard money, we have to find a way to reduce our power consumption.”
So you summoned the previous 12 month utility bills to examine energy consumption patterns, and pretty
soon you realized that most of the electricity consumption is due to the light bulbs. You suddenly have a
brilliant idea. Why not replace the light bulbs with a variety that consumes low power? A light bulb
moment indeed.
Your next step is to figure out what varieties of light bulbs are out there. Fortunately this is easier than
catching a snitch in a game of quidditch. A quick search revealed that there are 3 types of light bulbs:
Regular incandescent bulbs (the kind Hogwarts currently uses)

Compact Fluorescent Light bulbs (CFL)
Light Emitting Diode bulbs (LED)
1 of 15 12-Oct-20, 2:38 pm
Doing Cost Benefit Analysis in Excel - a case study » Chandoo.org - L... https://chandoo.org/wp/cost-benefit-analysis-in-excel/
Now your job is to do a cost benefit analysis of these options and pick one.
What is cost benefit analysis & how to do it?
Cost benefit analysis, as the name suggests is a process of identifying all the costs & benefits of different
decision choices and finding which choice offers maximum benefit for minimum cost.
It is a generic technique and the implementation varies depending on situation, industry and available data.
A typical cost benefit analysis involves these steps:
1. Gather all the necessary data
2. Calculate costs
1. Fixed or one time costs
2. Variable costs
3. Calculate the benefits

4. Compare costs & benefits over a period of time
5. Decide which option is best for chosen time period

6. Optional: Provide what-if analysis
Let’s conduct cost benefit analysis for our light bulb problem and figure out which option is best.
But first, download the cost benefit analysis workbook
Click here to download the cost benefit analysis workbook. Refer to it as you read this article for best
results.
1. Input Data & Assumptions
For each type of bulb we need to find out below information:
2 of 15 12-Oct-20, 2:38 pm
Costs:
Price
Electricity consumption (watts/hr)

Life time in hours
Benefits:
Amount of light (lumens) generated by the bulb
Assumptions:
We also need to assume a few things to keep our cost benefit analysis model realistic & simple.
Some of the assumptions we can go with are,
Global assumptions:
We need only 1 bulb (doing analysis for n bulbs is just a matter of multiplying 1 bulb results
with n)
Analysis will be conducted in Indian Rupees

Let’s compare bulbs that give same amount of light (lumens). This means we can ignore the
benefit part and focus on costs alone
This analysis ignores any impact / costs / benefits associated with environmental impact (CO2
emissions, harmful metals like mercury, heat generation etc.)
Analysis time frame is 5 years.
Other assumptions:
Average usage of bulb per day is 8 hours.

Cost of electricity is Rs. 5 per unit (KWH)
Inflation for electricity cost is 1%
Once we have all the data, tabulate it in Excel like this:
2. Calculate Total Cost of Ownership
3 of 15 12-Oct-20, 2:38 pm
Once we have all the necessary data, let’s calculate the total cost of each option (Regular, CFL & LED) over a
period of 5 years.
This step involves calculating both fixed & variable costs.
Fixed or one time costs:
The fixed cost for each light bulb type is nothing but the price.
But wait… what about the life time of bulb?
Since each type of bulb has certain life time, we will have to pay for replacement of bulbs too.
This means, apart from fixed cost at the start of time period, we will also have a variable cost that depends
on the life time of bulb type.
Variable costs:
There are 2 variable costs in our analysis.
1. Electricity consumption cost

2. Bulb replacement cost
Electricity consumption cost:
This is calculated by below formula:
Wattage per month / 1000 * Inflated unit cost
The actual Excel formula looks like this:
FV($C$13/12,$B20,-$C$14*30*C$8*$C$12/1000)
How this formula works?
To understand this formula, first imagine what the total unit cost should be at the end of Month x.
For first month, the cost is =total monthly usage in hours * watts per hour / 1000 * unit cost * (1 +
inflation/12)^1
For second month, the cost is same as above, but the exponent in the end becomes 2.
Let’s say, the blue part of the formula is denoted by something.
Then, the cost at the end of Month X will be,
=something * ( (1+inflation/12)^1 + (1+inflation/12)^2 + … + (1+inflation/12)^X )
Oh, all this math is confusing… Isn’t there a simple spell to answer this?
I am glad you asked. There is a spell to get this answer in one shot. It is called as FV()
The FV formula calculates sum of above series.
We simply write
4 of 15 12-Oct-20, 2:38 pm
= -FV(inflation/12, month number, total monthly usage in hours * watts per hour / 1000 * unit cost)
to get the answer we want.
Why the minus sign in front of FV?
This is because, by default FV returns values in negative. It has got something to do with how banks always
take money from us, but are very reluctant to give back or like that.
Bulb replacement cost:
The unit cost formula felt like trying to catch a snitch while riding a broomstick upside down. Thankfully, the
bulb replacement cost formula feels like sitting in the crowd, cheering match while eating chocolate frogs.
The calculation for bulb replacement goes like this:
Cumulative usage in hours / life time of the bulb * unit price of bulb
Here is the formula for this:
(INT(cumulative usage/ life time of the bulb)+1)*unit price of bulb
Why use INT(…) + 1
Let’s say the life time is 1,000 hrs, cost is Rs 20 and we use 240 hrs in first month. Our cost is still Rs. 20,
not 24% of 20.
Likewise, at the end of 5th month, our total usage would be 1200 hrs (240 x 5 = 1200) and we must buy a
new bulb as the life time is only 1000 hrs.
The replacement cost is not uniformly spread across months (or hours). It happens once at beginning and
then recurs once per lifetime of the bulb.
Hence we use INT to round the cumulative usage / life time to the integer portion (ex: INT(240/1000) will
be 0) and add 1 to it as there is initial cost.
Explanation of these formulas in our spreadsheet
Look at below illustration to understand how these formulas look in the cost benefit analysis worksheet.
5 of 15 12-Oct-20, 2:38 pm
3. Calculate benefits
This part is not required for our problem as the benefits are same for all 3 types of bulbs. You can use logic
similar to cost calculation when the benefits vary. For example if you want to do cost benefit analysis of 3
types of investment choices – mutual funds, stocks, bank deposits, then you can use below framework:
Costs:
Brokerage costs
Entry costs
Operating expenses
Exit costs
Volatility / risk factors
Benefits:
Return of the investment
Liquidity benefit
4. Compare costs & benefits over a period of time
Once we have these cost & benefit calculations ready, we need to calculate them for 60 months (5 years) for
all 3 types of bulbs.
The resultant table looks something like this:
6 of 15 12-Oct-20, 2:38 pm
5. Decide the winner
Once we have all the numbers, it is just a matter of picking the winner. If you are comparing costs, pick the
lowest cost item. If you are comparing benefits, pick the item that offers most benefit / cost ratio.
How to convince your boss about the decision?
While it is easy to decide which option is the winner by just looking at numbers, when you take this proposal
back to Dumbledore, he may want a little more explanation. This is where a visualization of cost benefit
analysis can help.
Example – Visualization of Cost benefit analysis
Here is a completed visualization of our light bulb cost benefit analysis.
How to create this chart?
Simple, just follow below steps.
1. Select the total cost of ownership table that you calculated
2. Insert a new line chart
7 of 15 12-Oct-20, 2:38 pm
3. Format the chart as per your (or your boss’) taste

4. Done
Things to keep in mind:
Go with line charts if your analysis is against a time period or similar

Go with column / bar charts if you are comparing various options with one time costs only
Format the chart so that it is easy to identify winning choice at each point of time.
Adding what-if analysis
What if analysis is a great way give power to your decision makers. When you prepare a cost benefit analysis
model like above, you will always hear questions like:
So what would be the total cost for using 12 CFL bulbs 16 hours per day for next 25 years?
In above case, how much would we save if we switch to LED bulbs?
What would be the cost for 30 years? 10 hours a day? 20 bulbs?
Thanks to powerful Excel form control feature, you can easily add a comprehensive what-if analysis tool
to your model.
Like this:
Process for adding what-if analysis
Follow below process for including what-if analysis in your spreadsheet models.
1. Identify all possible scenarios for which what-if analysis may be required.
2. Determine the variables (in our case, the variables are number of bulbs, bulb type, usage in
hours & years)
3. Figure out what output should be displayed (in our case, the output is total cost and a
comparison with other bulb types)
4. Set up an input area where user can select any combination of variables
5. Use form controls, slicers, data validation, VBA or simple input cells for gathering this data
Tip: click on those linked words to understand how to set them up
6. Write formulas that link to the user input cells / form controls
8 of 15 12-Oct-20, 2:38 pm
7. Display the output (text, charts etc.)
Please examine the download workbook for actual implementation of this.
Guidelines for creating better analysis models
Whenever you are analyzing something like this, please follow below guiding principles for awesome results.
Do your research first: Identify all factors, inputs, assumptions & facts that impact the
decisions. Spend sometime researching before jumping in to Excel.

Set up separate areas of input, analysis & output: Create separate areas in your workbook
to handle inputs, calculations & outputs (such as charts, text). Clearly demarcate them by using
different styles or headers for each section.
Avoid analysis paralysis: Keep your analysis workbooks simple & realistic. Don’t over
complicate them with too many inputs or too much calculation. If a certain factor is irrelevant or
too complicated to consider for your analysis, ignore it. Example: in our analysis we ignored
benefits as they are same for all 3 options. We also ignore environmental impact as it is tricky to
calculate.
Use consistent formulas: Write your formulas in such a way that same pattern is repeated
many times. This way you can write once and use the power of relative & absolute
references in Excel to fill the formulas everywhere.

Let users play with your model: Include what-if analysis or form control based interaction in
your workbooks so that your users can play with the model and get answers for their questions.
Visual explanations: Visual explanations like charts, dashboards are very powerful &
memorable. So depict your results visually as much as possible. Remember the old adage, a
picture is worth thousand words.
Related: Spreadsheet modeling best practices for analysts
Download Cost Benefit Analysis workbook
Please click here to download cost benefit analysis workbook. Examine the calculations & form
controls to learn more.
Cost benefit analysis – your experiences please…
Cost benefit analysis was a big part of my work when I worked as an analyst. Now I am in the role of a CEO
and it is even more relevant for me. For most situations I create a simple Excel model to examine the costs
Sharethe
& benefits to decide on win
FB Tweet this Post to LinkedIn
What about you? How do you analyze costs vs benefits? What techniques do you use? Please share your
stories, examples & tips in the comments section.
Want more? Introducing 50 ways to analyze data course
If you like to learn how to analyze data, gather insights, prepare outputs & interpret results, then you will
love my new course – 50 ways to analyze data.
9 of 15 12-Oct-20, 2:38 pm
Welcome
The above example is lesson number 24 in to Each
our course. Chandoo.org
of the 50 lessons deal with common business
analysis
Thank situations, case for
you so much studies & techniques
visiting. My aim issotothat
makeyouyou
canawesome
become the in analytical wizard
Excel & Power BI.you always
I do this by
sharing
wanted to. videos, tips, examples and downloads on this website. There are more than 1,000 pages with all
things Excel, Power BI, Dashboards & VBA here. Go ahead and spend few minutes to be AWESOME.
This course is now open.
Read my story • FREE Excel tips book
If you want to know more about it, please click here.
19 Comments
Ask a question or say something...
Tagged under advanced excel, cost benefit analysis, downloads, Financial Modeling, form controls, FV,
Learn Excel, line charts, Microsoft Excel Formulas, no-nl, screencasts, solo
Category: Analytics, Charts and Graphs, Financial Modeling
PREVIOUS NEXT
CP028: How to tell business logic & rules to Exc el? What is the length of longest winning streak? [Exc el homework]
19 Responses to “Doing Cost Benefit Analysis in Excel – a case study”
1. Kawser Ahmed says:

January 28, 2015 at 8:55 pm
It shows my address is already subscribed. Am I listed in the mail list?
Reply
2. Krishna says:
January 29, 2015 at 4:54 am
Truly magnificent.
Reply
3. Hardy says:
January 29, 2015 at 12:04 pm
Hello Chandoo,
Great post to become awesome.
Just a minor matter. Please check the units of Power, it is "Watt" not "Watts per hour". If a 60 Watt
bulb is used for an hour it uses 60 Watthour(= 60 Wh) of energy, divided by 1000 this gives 0.06
kWh.
I know this is not a site for physics, and is has no impact for the end results, but it may confuse some
of your readers and blur a for the rest good example.
I love your site!
Regards,
Hardy
Reply
4. Carlos says:
Very good model Chandoo, simple and to the point.
10 of 15 12-Oct-20, 2:38 pm
Just to help improve the input process in an evaluation.

Be doubly careful if your decision depends too much on assets / articles lifetime.
As an example: advertised bulb CFL lifetime is 8000 hr. But this only happens at the Lab and only if
you turn on the bulb once per day.
Reality is that in many locations, electricity voltage & power is variable, and bulbs are turned on more
often increasing the probability of burning. So the real lifetime of bulbs are not too different between
the options.
Regards
Carlos
Reply
5. ChrisAd says:
Good post but missing very important issue. LEDs deteriorate with time, so just after 5k hrs usually
the LED is capable of 50-60% of initial Lumens. Quite a drastic drop.
As for the lifetime both CFL and LED lights (the mainstrem ones) lifecycle is around 6-8k hrs. And in
places where lights is often switched on/off the lifetime of CFL/LED drops to 3-4k hrs.
Reply
6. Bob says:
Hi Chandoo. Interesting analysis as always. I especially liked your what-if tool.

Another way to think about multi-year cost/benefit is from a discounted cash flow perspective. Using
your example I would use the Incandescent bulb as the base line and calculate the differential cash
flows for the two alternatives. Period zero would be an incremental investment (cash out) of 100 for
the CFL and 380 for the LED. Benefits (cash in) would be each period's cost savings for each
alternative comparing their costs to the Incandescent's (including any additional bulb purchases). You
could then use these cash flow estimates to calculate simple Payback but I would discount the cash
flow streams (excluding initial cash outlay) using the business's Weighted Average Cost of Capital
(WACC) or Hurdle Rate and Excel's NPV or IRR functions. Subtract out that initial cash outlay and the
result would suggest that, all other factors being equal, the highest NPV (or IRR) is the best
alternative. A negative NPV, or an IRR less than the discount rate, would suggest the Incandescent is
the better alternative. The benefit of this approach is that it considers the always important time
value of money.
One final thought, I would do this type analysis with annual data. The monthly nuances aren't worth
the trouble - especially when you are forecasting the future.
Reply
The Stig says:

February 2, 2015 at 4:08 pm
Hi Bob. I like your approach. Do you think you could adjust Chandoo's spreadsheet to match
your idea?
Reply
Bob says:
Sure. But I am not sure how to post a sample workbook here.
Reply
Hui... says:
@Bob
You can't attach a file here
Ask the question in the Chandoo.org Forums

http://chandoo.org/forum/
Where you can attach a file
11 of 15 12-Oct-20, 2:38 pm
Reply
7. Ericson says:
Hi Chandoo. I am always geeking out on this website. I agree with Bob. I think an important aspect of
time value of money is being lost here. the expensive upfront cost of the LED typically outweighs the
low cost of energy. I think long run though this model indicates that LED's reign supreme in a
childless home that is. As always keep up the good work.
Reply
8. Bob says:
Two other points I neglected to include in my earlier post.
First, NPV and/or IRR calculations should use risk adjusted cash flows. With any cost/benefit forecast
there is some degree of risk. (As someone once said, forecasting is difficult, especially about the
future.) For example, if because of the CFL lifetime risk noted by Carlos, and the LED lumen output
risk pointed out by ChrisAd, you estimate the probability of achieving the incremental cash flow
benefits of these alternatives is only 60%. For the NPV calculation you would then use only 60% of
the originally calculated benefits -- a 100 Rupee cash benefit becomes 60 for NPV purposes.
Secondly, somehow I forgot the always present tax authorities. NPV/IRR costs (if expense, not capex)
and benefits should be after tax. Depending on your country and your tax situation your 60 Rupees
may become 40.
So if you adjust your cash flow stream for risk and taxes you are good to go. Sorry I forgot these two
important factors in my initial comment.
Reply
9. Excel Roundup 20150202 « Contextures Blog says:
February 2, 2015 at 5:02 am
[…] Chandoo has a light bulb moment, while setting up a cost benefit analysis. […]
Reply
10. The Stig says:

Hi Chandoo. There is a unique flaw in your model specifically related the cost effectiveness of light
bulb technologies. The flaw has nothing to do with the challenges indicated by the other commenters.
It also comes with a fun story.
It was spring break for my two young children. We visited a local science and technology museum
where we live. I first identified the flaw watching my children play with one of the hands-on exhibits.
The exhibit was a small bicycle connected to a generator. The generator is connected to three light
bulbs, regular, CFL, and LED. As you pedal the bike the lightbulbs illuminate. Light pedaling
illuminates only the LED. Very aggressive pedaling illuminates all three bulbs. The purpose of the
exhibit is to show children how much extra energy is required to power regular lightbulbs. Simple
enough in a very linear world.
The flaw I identified, then validated with the museum staff, is the math is completely linear. Meaning
the math favors LED technology assuming 100% of the light is required 100% of the time, in the
same room, and assumes the light is either on or off.
1) Buildings tend to have multiple rooms, which have different lighting requirements. Think about
your house.
The lights over the vanity mirror in your bathroom may only require 1 x LED in terms of total lumens
however may require multiple bulbs to eliminate shadows while applying makeup. Which takes a short
amount of time, then the lights are turned off for much of the day. The cost of LED may be too high
based on the short amount to time the lights are in use.
Lamps in your living room may have a 3-way switch that progressively increases the lumens,
requiring a special bulb.
Your back porch may require a high power bulb that shines brightly over a large area.
12 of 15 12-Oct-20, 2:38 pm
In these cases you need to identify the bulb technology that meets the "art" side of the equation
before applying the "science" part. When done correctly you will identify a mix a build technologies
that meet your overall requirements.
2) CFL and other specialized bulb technologies cannot be used with a dimmer switch. Only a
traditional on-off switch. The ceiling light in my kids bedrooms are connected to a dimmer switch,
allowing me to progressively change the lumens up or down depending on need and time-of-day. That
barrier eliminates some bulb technologies from the equation for those rooms.
Net/net, in a linear world we would always choose LED technology. However, the more accurate
analysis is to treat each room as it's own cost analysis based on your lighting requirements and use
case.
Reply
11. Doing Cost Benefit Analysis in Excel | CareWare says:
[…] http://chandoo.org/wp/2015/01/28/cost-benefit-analysis-in-excel/ […]
Reply
12. Hans Mostafavi says:

The crux of the matter in this lesson is to learn how to use some Excel tools and techniques for
analysis. The choice of light bulbs is only an example, which appears to be subject of many
controversies. However, the numeric data associated with this example are pretty good for the
learning purpose of Excel techniques.
Excellent work Chandoo.
Reply
13. Trouttrap2 says:

Hi Chandoo,
I’m shy about asking, but if I buy 20 LED bulbs at 400 rupee each, then wouldn’t the first year cost
for an LED bulb be at least 8,000 for cost of bulbs (not including the energy cost)? The Quick
Compare says the total cost would be 6,088 (16hrs/day). If I’m buying bulbs, I would like to know the
upfront cost. Maybe I’m missing something in this cost-benefit. I enjoy your blog very much.
Reply
14. Jason says:

Hi Chandoo,
would like to know if the course would include supply chain analysis and modeling etc. If not, will you
consider adding them or conduct a separate course on this?
am particular interested to know more on this aspect.
Rgds,
Jason
Reply
15. Mariya Parusheva says:

September 13, 2016 at 8:44 pm
Hi Chandoo,
Thank you very much for sharing your experience and knowledge here! It became very useful
discussion. Thanks to all guys who shared their opinions and different solutions as well.
The article is EXCELENT and full of professionalism! A real example how excel can help you doing real
solutions.
Mariya
Reply
13 of 15 12-Oct-20, 2:38 pm
16. Harrison Delfino says:

May 2, 2017 at 10:55 am
For this, I had been using this and it's great.

It has instructions which can help you.
They also have live support and forum to help you anytime.
Reply
Leave a Reply
14 of 15 12-Oct-20, 2:38 pm
Get FREE Excel & Power-BI

Newsletter
Yes, sign me up
GET STARTED ONLINE CLASSES
ABOUT DOWNLOADS
15 of 15 12-Oct-20, 2:38 pm

Chandoo Cost Benefit

Încărcat de

Informații document

Descriere originală:

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Chandoo Cost Benefit

Încărcat de

Drepturi de autor:

Formate disponibile

Doing Cost Benefit Analysis in Excel - a case study » Chandoo.org - L... https://chandoo.

Last updated: September 2016

Facebook Twitter LinkedIn

Regular incandescent bulbs (the kind Hogwarts currently uses)

Light Emitting Diode bulbs (LED)

What is cost benefit analysis & how to do it?

A typical cost benefit analysis involves these steps:

1. Gather all the necessary data

3. Calculate the benefits

5. Decide which option is best for chosen time period

But first, download the cost benefit analysis workbook

1. Input Data & Assumptions

For each type of bulb we need to find out below information:

Electricity consumption (watts/hr)

Amount of light (lumens) generated by the bulb

Some of the assumptions we can go with are,

Analysis will be conducted in Indian Rupees

benefit part and focus on costs alone

Analysis time frame is 5 years.

Average usage of bulb per day is 8 hours.

Inflation for electricity cost is 1%

Once we have all the data, tabulate it in Excel like this:

2. Calculate Total Cost of Ownership

This step involves calculating both fixed & variable costs.

Fixed or one time costs:

But wait… what about the life time of bulb?

There are 2 variable costs in our analysis.

1. Electricity consumption cost

Electricity consumption cost:

This is calculated by below formula:

Wattage per month / 1000 * Inflated unit cost

The actual Excel formula looks like this:

How this formula works?

Let’s say, the blue part of the formula is denoted by something.

Then, the cost at the end of Month X will be,

=something * ( (1+inflation/12)^1 + (1+inflation/12)^2 + … + (1+inflation/12)^X )

The FV formula calculates sum of above series.

to get the answer we want.

Why the minus sign in front of FV?

Bulb replacement cost:

The calculation for bulb replacement goes like this:

Here is the formula for this:

(INT(cumulative usage/ life time of the bulb)+1)*unit price of bulb

Why use INT(…) + 1

not 24% of 20.

new bulb as the life time is only 1000 hrs.

then recurs once per lifetime of the bulb.

be 0) and add 1 to it as there is initial cost.

Explanation of these formulas in our spreadsheet

Volatility / risk factors

Return of the investment

4. Compare costs & benefits over a period of time

all 3 types of bulbs.

The resultant table looks something like this:

5. Decide the winner

How to convince your boss about the decision?

analysis can help.

Example – Visualization of Cost benefit analysis

Here is a completed visualization of our light bulb cost benefit analysis.

How to create this chart?

Simple, just follow below steps.

1. Select the total cost of ownership table that you calculated

2. Insert a new line chart