######## SECTION 5. ANALYSIS AND COMPARISON OF ALTERNATIVES

This section provides a comparison of the quantifiable benefits and
costs associated with the alternatives considered by the CME SIM Project
Team. Alternative 1, the Base Case, is not included in the comparison.
It simply continues with current processes and maintains existing
systems. Therefore, it involves no incremental recurring or
non-recurring costs; and does not have any associated system- or
process-related benefits.

Benefits and costs are compared for Alternatives 2 and 3. The analysis
shows that Alternative 3, the Corporate R&D Portfolio Management
Environment, is projected to cost \$7.49 million more than Alternative
2, the Enhanced Base Case, over the 5-year life of the project. However,
at full implementation the Corporate R&D Portfolio Management
Environment is expected to provide \$27.66 million more in annual
benefits than the Enhanced Base Case.

## 5.1 Overall ABC Methodology

The methodology described in the DOE *Analysis of Benefits and Costs
(ABC's)* *Guidelines* was used to perform the analysis of benefits and
costs on the two alternatives. In addition, general guidance prescribed
in Office of Management and Budget (OMB) Circular A-94 for conducting
benefit-cost analyses was used to ensure that all elements were
considered appropriately in the analysis. This methodology is similar to
the discounted cash flow technique widely used in the private and public
sector.

To perform this analysis, the benefits and costs expected from each of
the alternatives were identified and quantified. All future cash flows
(both positive and negative) were discounted based on the timing of the
cash flow and on the discount rate for the entire investment. The
discounted cash flows were added together to determine the overall net
present value (NPV) of the investment alternative.

Real dollars and discount rates were used in the analysis rather than
nominal dollars and rates. Real dollars (or constant dollars) are
dollars having the same purchasing power based on a time reference
period called the base year (in this case, FY 2000). This approach
excludes the impact of inflation on both the dollar values and the
discount rate. Since inflation was not factored into the investment
analysis, **monetary results should not be used for budgeting
purposes**. A real discount rate of 3.9 percent was used for the
investment analysis in accordance with OMB Circular A-94, Appendix C,
(revised January 2000).

For the purposes of this analysis, the alternatives were assumed to
start at the beginning of FY 2001 (October 2000) and expected to extend
for a project lifecycle of 5 years. A detailed description of the
methodologies used to estimate costs and benefits is provided in
Appendix E. Exhibits that support the comparison of alternatives are in
Appendix F.

**5.2 Comparison of Alternatives 2 and 3**

Table 5-1 compares the total system lifecycle costs of Alternatives 2
and 3. Total costs include personnel costs as well as equipment, travel,
training, software, maintenance, communications, and support contractor
costs. The system lifecycle costs are presented in constant base dollars
and present value (PV) dollars. The cost of implementing the Enhanced
Base Case is less than two-thirds the cost of the Corporate R&D
Portfolio Management Environment. For a detailed, year-by-year summary
of costs for each alternative, see Exhibits F-3 and F-4 in Appendix F.

+-----------------------------+---------------+------------------------+
|                             | **Enhanced**  | **Corporate R&D        |
|                             |               | Portfolio Management   |
|                             | **Base Case** | Environment**          |
+-----------------------------+---------------+------------------------+
| Total Lifecycle Costs       | \$9.76        | \$17.25                |
+-----------------------------+---------------+------------------------+
| Cumulative PV of Total Cost | \$8.85        | \$15.87                |
+-----------------------------+---------------+------------------------+

***Table 5-1***

***Total Lifecycle Cost Comparison (\$ millions)***

The system lifecycle benefits for the alternatives are presented in
Table 5-2. The benefit dollar amounts are initially presented in
constant base dollars. The PV dollars are shown directly below the
constant base dollar amounts. The benefits of the Corporate R&D
Portfolio Management Environment alternative outweigh the Enhanced Base
Case alternative benefits by more than 2 to1. For detailed information
on benefits, see Exhibits F-9 and F-10 in Appendix F.

+-----------------------------+-----------------+----------------------+
|                             | **Enhanced**    | **Corporate R&D      |
|                             |                 | Portfolio Management |
|                             | **Base Case**   | Environment**        |
+-----------------------------+-----------------+----------------------+
| Total Lifecycle Benefits    | \$38.22         | \$85.73              |
+-----------------------------+-----------------+----------------------+
| Cumulative PV of Total      | \$33.17         | \$73.12              |
| Benefits                    |                 |                      |
+-----------------------------+-----------------+----------------------+

***Table 5-2***

***Total Benefits Comparison (\$ millions)***

In addition to the overall 5-year benefits comparison, Table 5-3 shows
the annual benefit at full implementation. At full implementation, the
Corporate R&D Portfolio Management Environment annual benefits will
outweigh the Enhanced Base Case benefits by more than 3 to 1. See
Exhibit F-11 in Appendix F for an expanded view of the benefits.

### 

+-------------------------+---------+------------+----------+---------+
|                         | **R&D   | **Op       | *        | **      |
|                         | Facil   | erations** | *Program | Total** |
|                         | ities** |            | O        |         |
|                         |         | *          | ffices** |         |
|                         |         | *Offices** |          |         |
+-------------------------+---------+------------+----------+---------+
| Enhanced Base Case      | \$8.93  | \$1.22     | \$1.30   | \$11.45 |
+-------------------------+---------+------------+----------+---------+
| Corporate R&D Portfolio | \$24.81 | \$4.49     | \$9.81   | \$39.11 |
| Management Environment  |         |            |          |         |
+-------------------------+---------+------------+----------+---------+

Table 5-3

***Single-Year Full Benefit Comparison (\$ millions)***

The break-even analysis assesses the time required for a project to pay
for itself in discounted terms. In other words, it identifies the length
of time it would take to recover the initial investment on a project. It
is equivalent to looking at the cumulative benefits and costs for each
alternative over its lifecycle. Note that this dollar analysis is done
in terms of PV dollar amounts.

The break-even point for the Enhanced Base Case occurs in FY 2002. The
break-even point for the Corporate R&D Portfolio Management Environment
occurs in FY 2003. This is displayed graphically in Figure 5-1. For a
detailed schedule of the cumulative cash flows for each alternative, see
Exhibits F-1 and F-2 in Appendix F.

###### ![](media/image1.wmf){width="5.242361111111111in" height="3.497916666666667in"}Figure 5-1

###### Break-Even Analysis

One technique used to evaluate investment alternatives is NPV. The NPV
was used to determine whether or not an alternative would show a
positive return on expenditures. Due to the fact that estimates were
made in constant base dollars (the dollar amounts were not adjusted for
inflation), they were converted into PV to compare alternatives
directly. Since "real" constant base dollar values were used, a real
discount rate was employed to convert constant base dollars to PV. The
NPV is the difference between the total PV benefits and the total PV
costs. The benefit-cost ratio (BCR) was calculated by dividing the PV of
benefits by the PV of costs. The total NPV and BCR of both alternatives
are shown in Table 5-4.

+-----------------------+-----------------+----------------------------+
|                       | **Enhanced**    | **Corporate R&D Portfolio  |
|                       |                 | Management Environment**   |
|                       | **Base Case**   |                            |
+-----------------------+-----------------+----------------------------+
| Net Present Value     | \$24.32         | \$57.25                    |
+-----------------------+-----------------+----------------------------+
| Benefit-Cost Ratio    | 4               | 5                          |
+-----------------------+-----------------+----------------------------+

***Table 5-4***

***Total NPV and BCR Calculations (\$ millions)***

## 

## 5.3 Summary

Although the Corporate R&D Portfolio Management Environment is the more
expensive alternative, it promises a higher benefit-cost ratio, since
projected annual benefits at full implementation outweigh the Enhanced
Base Case alternative by more than 3 to 1.

It should be noted that numerous and significant non-quantifiable
benefits associated with the three alternatives under consideration were
identified by the CME SIM Project Team that were taken into account
before reaching a recommendation. These are explained in detail in
Section 4.