Analysis of an NPV Calculation Mobile Job Centers Essay

Mobile Job Centers

The mobile job centers will provide a positive net present value by Year 6, and will add value from that point onward. The project will be deeply in the red for most of the early years. The project has high upfront costs relating to the acquisition and outfitting of the buses. Furthermore, the ongoing cost structure is very high - costs like a Director's Assistant are absolutely unnecessary and driver salary is really high for that type of job. So there are some issues with the cost structure as presently proposed. On one hand, the project will have a positive NPV is left to run long enough, but those results are based on assumptions that may not hold up well into Year 6. Basically, the project's positive NPV rests on long-run cumulative effects, so in order to believe these projections, we would need to see some evidence that this type of effort has succeeded in the past. The project's profitability is rooted in multiplier effects over a number of years – multiplying a figure itself derived from the prior year's multiplier. This escalation of value is ultimately the crutch holding up these numbers, rather than actual positive cash flow. In essence, the benefit figures seem spurious. Also, I have no idea what a seed grant is, or why it has been included in this. An operating grant is fine, but a seed grant wouldn't be an ongoing benefit, per the definition of the word seed.

The project appears to be something to the effect that mobile job centers are going to be built into buses. These buses will apparently help people find jobs. One of the key assumptions is that these job placements will be incremental – that the buses will help better align people with jobs. The job placement figures presented here do not explain how that will happen – it assumes a certain amount of placements, and that those placements are incremental in nature – all of them. That is highly spurious; there are many ways for people to find work. Some jobs placed through the buses would have been placed by other means. Some people would have found other jobs that maybe aren't as good, but that still reduces the incremental benefit. By not factoring in only incremental cash flows, this is an example of misusing a net present value calculation.

Another issue with the assumptions is that the project is going to last at least eight years. That's a couple of election cycles. That's potential a recession that cripples incomes. The reality is that it will be difficult to quantify the benefits, which means that the project will appear to be, on accounting statements, a money-loser. And on top of that, the city's employment rate is a terrible measure to evaluate the success of the project because so many other factors influence that. Without proper measures, it is unwise to assume any project will continue for eight years through multiple changes in leadership and priorities.

As noted above, most of the positive financial impact comes from the cumulative effect of positive early job placements – that people who find themselves in a better starting position will build on that. This assumption is true – but there is still the question of whether the jobs are out there. If we are talking about training people, then clearly there is value that can have a cumulative effect. But placing people – it might work for those people but at the expense of someone else who would have received that job. Those effects are not taken into account – again, an assumption of convenience that has the end effect of allowing this project to show positive net present value. It is less than convincing that without actually adding value to the workers – skills that they can transfer from one position to another and otherwise would not have had – that the benefits of this bus are actually incremental.

One of the other key assumptions warrants discussion as well. That assumption is that there is linear progression to residual benefits without end. In the real world, there is a ceiling for most people, depending on their skill sets and education level. It cannot be assumed a straight upward linear projection of earnings, in the absence of building the sort of skills that would allow for that. As an example, if the job bus lines someone up with a role in a kitchen, and they do well, they may enjoy linear career and income growth for a number of initial years. But once they become head chef, that's their ceiling. Assuming neverending growth all the way up to CEO is simply not reasonable, yet unending linear growth is what was built into this model. Again, the model's findings are predicated on questionable, and arguably overly simplistic, assumptions about benefits in the distant future. That each error just happens to make the final NPV number look better is interesting at the very least.

The cost-benefit ratio is presented as 1.223. If the cost and benefit figures are taken at face value, the role of a net present value calculation is to provide a "go/no go" decision heuristic; if the project has a positive NPV then it should be undertaken because it adds value. Now, a government project need not add value, though it is nice to show that the project does. But it's not necessary. The cost-benefit ratio would be a useful decision-making tool in the sense that there is at least an unofficial cap on what the government can spend. Thus, it must choose between a number of different projects, and there will be some mutual exclusivity. Thus, having a project that has a positive cost/benefit ratio is valuable, and the cost-benefit ratio of this project will be compared against some of the other projects that are competing for the same dollars. Without any point of comparison, one can only take this cost-benefit ratio at face value, that it has a net benefit. The NPV calculation told us that. So the comparable is important to determine whether this is a good cost-benefit ratio or not.

One of the issues with the project, aside from the above, is the breakeven point is in Year 6. That is a long time out, a lot of faith to put in the project. It's a couple of buses and some administration, yet still takes six years to break even. The…