COST-EFFECTIVE ANALYSIS IN

EDUCATION
Submitted to :
Prof . Dr . Muhammad Iqbal

Economics and Financing of Education

 5 Cost-Effective Analysis in
Education
5.1 Introduction and Description
5.2 The use of Cost Effective Analysis in
Education
5.3 Relating output measures to cost
5.4 Cost Effective Analysis case studies of
various Intuitions
5.5 Cost of Educational Projects
5.5.1 Techniques for costing
educational project
5.5.2 Costing projects in Pakistan
alone with use of Project appraisal
techniques
 Economic Analysis is the comparative
analysis of alternative courses of action
in terms of both their costs and results
in order to assist policy decisions
 Economic Analysis of Projects
There are four methods on Economic
Analysis of projects

1. Cost Effective Analysis (CEA)

2. Cost Benefit Analysis (CBA)

3. Cost Minimization Analysis (CMA)

4. Cost Utilization Analysis (CUA)
 Economic Analysis of Projects ??? Its
need
• To assess the efficiency and effectiveness
• Policy making, Planning & Management
• Prioritization and resource allocation
• Avoiding wasteful expenditure
• Cost minimization
• Accountability
 Cost Effective Analysis (CEA)
• Cost-Effectiveness Analysis is often used in
the field of Education / Health services, where
it may be inappropriate to monetize Education
/ Health effect.
(Patrick J. McEwan)
 5.1 (a) Introduction
• CEA is an aid to investment choice that is related to
discounting method of appraisal.
Discounting Method of Appraisal , mean???
• It is a measure to help decide about the investment in
a project on the judgment that the project represents a
good use of resources and that it will produce a
surplus of benefits over the cost.
Name of Discounting Method
(i)Net present value (ii) Accounting rate of return
(iii) Internal rate of return(vi)Modified internal rate of
return(v)Adjusted present value(vi) Profitability index
(vii)Equivalent annuity(viii)Pay back period
(ix)Discounted pay back period (x)Real option analysis
 (b) Description
• Cost-effectiveness Analysis is a comparison of
the cost of implementing a new information
system or upgrading an existing one to the costs
that would be involved in retaining the existing
way of doing things (i.e. the legacy system or the
non-computerized approach). a new system does
not always represent an improvement. for
example, upgrading an old character-based user
interface to a graphical user interface may not
provide a more usable interface and may not save
time or cost.
• Any educational intervention has an outcome and
a cost. A measure of the cost effectiveness is
obtained by measuring costs against outcomes.
 Cost Effective Analysis
• CEA is a form of economic analysis that compares the relative costs and
outcomes (effects) of two or more courses of action. Cost-effectiveness
analysis is distinct from cost-benefit analysis, which assigns a monetary
value to the measure of effect.

• Outcome of 2 or more actions is unequal Costs are also

different

• Cost per unit Subject (Skill / Competency) outcome is

calculated and compared

• Compares Cost per unit Subject (Skill / Competency) outcome

Cost Effective Analysis

Choose
the most
B
cost
effective

C
 Cost Effective Analysis
• No monetary value assigned to outcome
• Outcome used:
–cost per Student
–cost per Skill(s)
– Years of Jobs/Working
– Life Expectancy
• cost-effectiveness ratio (CER)
Cost A
CER =
Effectiveness A
Cost Benefit Analysis
 (b) Description
• Example :
AIOU want to establish Printing press by it own.
Require number of Printing Books for Students
per day.
Marketing cost Vs Own Printing cost
Evaluation (in term of money)
• Cost of printing press
• Value of place
• Cost of installation of printing press
• Cost of Folding / Binding / Cutting / Packages
• Expected Life of printing press
• Discount and expected value of
money
• Maintenance cost
Benefit : Number of printing
pages+ Books per day
Use : Cost – Benefit Analysis
 Additional Example
• Establishment to open Montessori School in
Lahore
• Project Economics
(Internal Rate of return , Payback Period per year,
Net Present Value)
• Project Financing
(Total Equity, Bank Loan, Markup to the Borrower ,
Tenure of the Loan , Grace period)
• Project Cost
(Furniture and fixture , School’s office Equipment ,
Pre- operating cost , Initial working capital )
• Land Requirement
• Office Equipment
• Utility Cost
• Playing Equipment Cost
• Human Recourse Requirement
Revenue Generation
• Number of students per year with fee
• Rate of growth per year
• Rented from parking fee and canteen
Cost Benefit Analysis
 5.2 The use of Cost Effective Analysis
in Education
• Analyzing cost effectiveness of an intervention
can involve evaluating various options, for
example:
1. Reviewing a number of alternatives all of which
are within the realm of cost feasibility;
2. Considering which supplemental programs ought
to be used to improve an educational outcome;
3. Trying to identify which program has the best
average outcome per student relative to the per-
student cost.
 5.3 Relating output measures to cost

(i)Net present value

(ii) Internal rate of return
(iii)Modified internal rate of Return
(iv)Adjusted present value
(v) Profitability index
(vi)Pay back period
(vii) Growth rate
 5.4 Cost Effective Analysis case
studies of various Intuitions
• High school in Lahore
TOTAL COST OF OPENING = PRK 6.37 MILLION
NPV(NET PRESENT VALUE)= PRK 14.74 MILLION
IRR (INTERNAL RATE OF RETURN)=65%
PAYBACK PERIOD=2.38 YR
• Montessori school in Lahore
TOTAL COST OF OPENING = PRK 2.2 MILLION
NPV(NET PRESENT VALUE)= PRK 11.22 MILLION
IRR (INTERNAL RATE OF RETURN)=51%
PAYBACK PERIOD=3.16 YR
RESULT = YOUR OPINION
(Ref : SMEDA Feasibility Reports)
 5.5 Cost of Educational Projects
• For Example :
The Finance minister has allocated Rs 210 crore
(Say) on Education Department .

• Now , an analysis has to be done so that

whatever money has been invested had it been
yielding the desired result , or not has to be
examined.
• If the returns are not favourable then re-thinking
, re-planning and re-consideration has to be
done.
• Applying this to educational interventions,
there are a host of options from which
Primary schools, High and Higher Secondary
schools, and higher education institutions can
choose to improve educational outcomes.
• It shows at least some evidence of
effectiveness, although the standards of
evidence vary considerably. Thus, at the very
least, consistent standards of evidence are
needed to compare the competing
alternatives.
• Estimated the costs of the alternatives.
• Even if one alternative is 10 percent
more effective than another, it will not
be preferred if it is twice as costly.

• Thus, both costs and effectiveness must

be known in order to make good public
policy choices.

School A
Number of students
= 2000
Drop out rate = 5 %
Pass successes ratio = 98 %
No . of Teachers = 50
Salary and other cost =1 M
per year
Example
School B
Number of students
= 3000
Drop out rate = 8 %
Pass successes ratio = 90 %
No . of Teachers = 60
Salary and other cost =1.5
M per year
School c
Number of students
= 5000
Drop out rate = 10 %
Pass successes ratio = 80%
No . of Teachers = 75
Salary and other cost =2 M
per year

Effective school Effective school Effective school

No of students in exam = No of students in exam = No of students in exam =
1900 2760 4500
No. of pass students = No. of pass students = No. of pass students =
1862 2484 3600
Per student cost = Per student cost = Per student cost =
PRK 53 7. 05 PRK 603.86 PRK 555.56

Result (evidence of effectiveness) :

Most Effective School = School A ,
Least Effective School = School B
Type of Consequences
Cost Result
Analysis
Cost Different cost Cost per unit
effectiveness Money of a subjects
measure e g., of subject
subject
Choose
Cost Benefit As for CUA but Net (RS) cost:
Money valued in benefit ratio.
money
THANK YOU