Advancing Statewide Spatial Data Infrastructures in Support of the 

National Spatial Data Infrastructure (NSDI) 

_______________________________________________________ 

USGS Contract #: 08HQCN0024 May 2009 Page 1 of 5 

Applied Geographics, Inc. 

Economic Justification: 

Measuring Return on 

Investment (ROI) and 

Cost Benefit Analysis 

(CBA) 

Introduction

Your business plan must have some 

type of economic justification to provide 

your executives and elected officials 

with financial information. It will help 

them know that they are doing the “right 

thing” by implementing the requested 

program. A popular economic 

calculation for the attractiveness of an 

investment is “Return on Investment” 

(ROI). ROI is a calculation of the most 

tangible financial gains or benefits that 

can be expected from a project versus 

the costs for implementing the 

suggested program or solution. Cost 

Benefit Analysis (CBA) is more 

comprehensive than ROI, and attempts 

to quantify both tangible and intangible 

(or “soft”) costs and benefits. The 

purpose of this guide is to make these 

measurement techniques a little more 

understandable. 

Calculating ROI 

ROI is represented as a ratio of the 

expected financial gains (benefits) of a 

project divided by its total costs. As a 

formula it appears as: 

ROI = (net benefits/total cost) 

In the equation above, net benefits 

equals total benefits minus total cost. It 

is the incremental financial gain (or 

loss). 

If a parcel mapping project costs 

$50,000 to implement, and you 

demonstrate $25,000 in net benefits, 

then the ROI calculation would appear 

as follows. 

ROI = (25,000/50,000) 

The ROI in this example is 50% which 

represents a positive return on the 

investment. It takes an ROI ratio greater 

than zero for a program to be attractive, 

typically. A sub-zero ratio may not 

automatically “kill” a project, because it 

may result in a required capability that 

doesn’t currently exist. Not all 

government functions are required to 

have a positive rate of return as they are 

in the business world. Government is 

required to provide certain services to 

the public, and so is more tolerant of low 

ROI. 

Comparing the ROI of various options 

will help to ensure that you select the 

most cost effective technology and 

approach. You can provide additional 

support for negative (and positive) rates 

of return with the qualitative benefits 

identified by your planning team. Later 

in this guide, a discount factor will be 

applied, to show the Net Present Value 

(NPV) of future costs and benefits, 

which is an important consideration 

when comparing alternatives. 

NOTE: Even a project with an 

outstanding ROI may be controversial or 

doomed to failure if the investment cost 

is very high. 

Performing CBA 

These calculations are more 

comprehensive than ROI, in that they 

attempt to quantify both tangible and 

intangible costs and benefits. 

Historically, CBA has been applied to 

large public works projects with societal 

cost and benefits that are more difficult 

to quantify than “hard” technology costs. 
Advancing Statewide Spatial Data Infrastructures in Support of the 

National Spatial Data Infrastructure (NSDI) 

_______________________________________________________ 

USGS Contract #: 08HQCN0024 May 2009 Page 2 of 5 

Applied Geographics, Inc. 

Intangible benefits and costs are very 

relevant to an overall determination of 

what is a good investment for the public 

well-being. SSDI implementation 

includes both types, and is therefore a 

candidate for applying CBA, if the 

expertise and resources are available to 

support the effort. There are a number 

of economic methodologies for 

monetizing benefits and costs that do 

not have easily discovered market 

prices, but these can be complex and 

any estimate derived from them may 

have relatively high uncertainty. 

Like an ROI calculation, the result of 

CBA is a ratio expressed as a 

percentage, and economic 

attractiveness is determined the same 

way: above zero is attractive, and 

below zero is not. The equation is the 

same, although more costs and benefits 

are included. That is the essential 

difference between the two methods. 

Effect of Time on ROI and CBA 

Calculations 

In most cases, executives and elected 

officials expect to see an economic 

justification based on phased benefits 

and costs over a three to five year 

window. Being able to show a positive 

ROI in a one or two year timeframe will 

probably make your project an instant 

hit, but this is an unusual circumstance. 

 

Given the time value of money, a dollar 

is worth more today than it will be 

tomorrow. To account for this economic 

fact, future costs and benefits need to 

be “discounted” in order to calculate 

today’s value (a.k.a., Net Present Value, 

or NPV). The discount factor, also 

known as the cost of capital, might be 

specified by various state authorities, 

and usually reflects the interest rate the 

state pays to borrow money when it 

issues general obligation bonds. By 

comparison, the federal Office of 

Management and Budget (OMB) 

recommends the following nominal 

discount rates for federal programs, 

depending on the length of the program. 

Duration 3 Yrs 5 Yrs 7 Yrs 10 

Yrs 

Discount 

Rate 

2.7% 3.3% 3.7% 4.2% 

Source: OMB Circular A-94 Appendix 

C, as of 12/12/08 

In the parcel mapping calculation of 

ROI, to apply a discount factor to 

determine the Net Present Value (NPV) 

of a future stream of benefits and costs, 

the following equation and factors would 

be used: 

B = Benefits; C = Costs; r = discount 

rate; t = time period; n = number of time 

periods. 

NPV equals the summation from t = 0 

(the initial start-up of the program) to t = 

n (the final year of the program) of [(Bt - 

Ct) / (1 + r)t ]. 

For a 3 year program, the equation 

would be as follows: 

NPV = [(B0 - C0)] + [(B1 – C1) / (1 + r)] + 

[(B2 – C2) / (1 + r)2

] + [(B3 – C3) / (1 + r)3] 

In the table on the parcel mapping 

example, the above equation was 

applied, and the resulting NPV 

calculated out to be $22,120. 

The longer the project duration, the 

greater the risks due to changes in work 

process flow and other external factors 

that may lead to a new project design 

and additional costs. 
Advancing Statewide Spatial Data Infrastructures in Support of the 

National Spatial Data Infrastructure (NSDI) 

_______________________________________________________ 

USGS Contract #: 08HQCN0024 May 2009 Page 3 of 5 

Applied Geographics, Inc. 

Initial Costs Year 1 Year 2 Year 3

Cumulative 

Total

Total Costs $35,000 $5,000 $5,000 $5,000 $50,000

Total 

Benefits $0 $25,000 $25,000 $25,000 $75,000

Net Benefit -$35,000 $20,000 $20,000 $20,000 $25,000

Net Present Value

Initial Year -$35,000

Year 1 $19,512

Year 2 $19,036

Year 3 $18,572

NPV = $22,120

 

Discount Factor (2.5 %) 0.025

Initial Period Denominator 1.000

Year 1 1.025

Year 2 1.051

Year 3 1.077

This table feeds our earlier example calculation of ROI = ($25,000/$50,000) where the 

ROI is calculated to be 50% for the parcel mapping project. By adding a discount factor 

and calculating NPV (see aforementioned formula), the economic attractiveness 

diminishes only slightly ($22K vs. $25K), but is still positive, and more meaningful 

because it accounts for the time value of money. 

Calculating Costs 

Most organizations have effective 

methods for identifying their costs. 

Information on personnel costs can be 

obtained from fiscal officers, there are 

often contracts in place (or as historical 

references) for certain services, and 

managers can turn to their counterparts 

in other organizations to obtain 

reasonable cost estimates. 

Include the following incremental costs 

when determining your total cost: 

o Labor Including Fringe Benefits 

o Overhead (if appropriate) 

o Additional Equipment Cost (not 

including additional costs for 

existing equipment) 

o Additional Software Cost (not 

including additional costs for existing 

software) 

o Physical Facilities (if additional 

space is required) 

o Contracting Costs 

You should also consider the various 

phases of a project and account for all 

of the costs incurred during each phase. 

Many people improperly ignore the 

“built-in” costs and only account for 

large contractual expenditures. 

Examples of built-in costs include: 

o Project Management 

o Contract Management 

o Quality Assurance and Control 

o Personnel Training 

o Project Maintenance 

o Security (if appropriate) 

Calculating Benefits 

This is the most difficult part of 

completing an economic justification. 
Advancing Statewide Spatial Data Infrastructures in Support of the 

National Spatial Data Infrastructure (NSDI) 

_______________________________________________________ 

USGS Contract #: 08HQCN0024 May 2009 Page 4 of 5 

Applied Geographics, Inc. 

There are very few guidelines that 

provide you with average benefit factors 

for implementing applications, data 

development, or coordination activities. 

NASA reported that adherence to open 

standards and interoperability 

specifications during project 

implementation resulted in 119% ROI as 

a “savings to investment” ratio. (See

http://www.egy.org/files/ROI_Study.pdf) 

Items to include in your study include 

“internal” or “external” costs and benefits 

to your organization. It is generally 

much easier to document the internal 

costs, because you should have a good 

understanding of the work process flow 

and where the savings will occur. It can 

be extremely difficult (or nearly 

impossible) to identify the “downstream” 

benefits that are accrued by other users 

and the general public. 

Examples of the internal benefits you 

should measure include: 

o Savings from new capabilities 

o Decreased time to perform repetitive 

tasks 

o Decreased travel 

o Decreased wait times 

o Fewer mistakes 

o Increase in billable services 

o Increased customer base 

o Improved customer satisfaction 

o Decreased training costs 

o Improved regulatory compliance (i.e. 

reduction of fines) 

o Reduced reporting requirements 

o Reduced telecommunications 

charges 

o Reduced dependency on 

consultants 

As already noted, accurately identifying 

benefits can be very difficult and time 

consuming. It helps to list all of the 

expected benefits and then prioritize 

them in terms of your “hunches” on the 

largest expected paybacks. Explain 

your assumptions and known biases 

related to your “hunches” when 

documenting your approach. After that, 

make your best guess on the ease of 

obtaining the information required to 

complete the calculation. Use these 

lists to set your priorities for working on 

economic justification. 

Examples of external and downstream 

benefits that you might measure include: 

o All of the above benefits that can be 

quantified in other agencies or levels 

of government due to the proposed 

initiative. 

o Public and Private Sector benefits 

that can be clearly defined (i.e. by 

having assessment data on-line, 

appraisers can perform 

assessments in their office and not 

have to drive to county or state tax 

offices, thereby saving them time 

and travel expenses) 

o Private sector benefits from being 

geospatially enabled (i.e. a company 

specializing in road centerline data 

gets access to better road geometry 

and provides more added values for 

other customers) 

o Public benefits from being 

geospatially enabled (i.e. being able 

to locate a hotel near a business 

appointment on a web based 

mapping system that saves time and 

travel expenses) 

These external and downstream 

benefits can be very complex to 

calculate and will probably be beyond 

the scope of your planning efforts. 

However, the members of your planning 

team should think about these benefits; 

and when they can be readily 

calculated, include them in your 

business plan. 
Advancing Statewide Spatial Data Infrastructures in Support of the 

National Spatial Data Infrastructure (NSDI) 

_______________________________________________________ 

USGS Contract #: 08HQCN0024 May 2009 Page 5 of 5 

Applied Geographics, Inc. 

Putting it in Perspective 

ROI and CBA calculations are useful, 

because they allow you to examine your 

options and make more informed 

choices. They are also an essential 

component of your business plan, 

because they become the “proof” that 

implementing a project is a sound 

business decision. ROI is useful when 

costs and benefits are tangible and 

tightly focused on a specific program 

with boundaries. CBA is more 

comprehensive, and is useful when both 

tangible and intangible costs and 

benefits need to be considered. 

Before you begin development of your 

business plan, you should determine 

what statutory or other requirements you 

have for developing ROI or other types 

of calculations in prescribed formats. 

Many states have specific guidance and 

formats identified in their budget or IT 

plans. In addition, you should determine 

the threshold for project value at which 

you must perform these analyses. The 

level of effort that you put toward 

ROI/CBA should be commensurate with 

the contemplated expenditure. For 

example, spending a week’s worth of 

your time to gather information and 

crunch numbers may not be a wise 

investment of time in order to justify a 

project expenditure of $10,000, but it 

might be if the amount is $100,000. 

As already noted, examples of ROI and 

CBA calculations for geospatial projects 

can be very elusive. Please share any 

information, tools, or new concepts with 

your peers. 

NOTE: This overview of ROI and CBA 

is a companion piece to the Strategic 

and Business Plan Guidelines

produced under contract to the Federal 

Geographic Data Committee (FGDC) 

Secretariat, in support of the Fifty States 

Initiative. The Guidelines and related 

materials are available on both the 

FGDC and NSGIC websites.