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Appendix E: Cost Analysis | |
The task is to produce a "vision" for five, ten, or even thirty years in the future, to define the technology that the schools of the future will need. That is largely an impossible task, given that the technology that will be used then has not been developed yet. Technology life cycles are simply too tight and too hard to forecast, to permit us to make concrete technological forecasts over that length of time. What we can do today, however, is to recognize that whatever technology we might need or want in the years ahead, that technology will cost money. Yes, it is true that the cost to obtain a given level of technology is continually dropping, however as technology costs drop, the base level of technology being deployed has risen in an opposite and offsetting fashion. Thus, for example, the cost per workstation (including hardware, software, installation and support) has remained remarkably constant at the $1,500 per workstation level. First Component. Given that, and given already articulated district goals for workstation-to-student ratios and observed enrollments, and knowledge of technology life cycles, we can calculate the first vision component: the scale of the investment that will be required to simply attain a goal of deploying current generation workstations at a rate of 1 workstation per four students, assuming 18,000 students, a three year life cycle, and a cost of $1,500/workstation: 18,000 students ---------------------- $1,500/workstation (1/3 of the total per year) 4 students/workstation Or $2,250,000/year, on a sustained ongoing basis (assuming three years to get all systems up to something approaching current generation technology). One component of the vision, therefore, is:
COMPONENT ONE: Predictable funding at the rate of $2,250,000 per year (in 1999 dollars) on an ongoing basis will be required to bring 4J School District to a stable, sustainable and relatively current workstation base. Related to that is the need for 4J to purge itself of obsolete workstations that are disproportionately expensive to support, and which cannot use current generation applications. By definition, at this time that implies at a minimum eliminating all workstations running Windows 3.1/3.11, and all pre-PowerMac Macintoshes.
Second Component. We also know that the value of those workstations is maximized when they are networked together. Thus, a second component is to provide local and wide area networking connectivity for those workstations. Again, it is impossible to know the technology that will be required in years ahead, but let us use the benchmark figure of one hundred dollars per machine per year as a starting target for local area networking (including cabling, network interface cards, network switch ports, and router capacity). Let us use $1 per month per student as a starting target for wide area networking costs. That implies costs of: 18,000 students ---------------------- $100/workstation == $450,000 4 students/workstation 18,000 students x $1/student/month x 12 months = $216,000 (that's sufficient to buy 18Mbps inbound at $1,000/Mbps/month, i.e., roughly today's rates).
COMPONENT TWO: $666,000/year for local and wide area networking costs on an initial basis, subject to material increases on an ongoing basis.
Notes regarding component two: (a) As a concrete target, assume local area networking targets are switched 100 Mbps full duplex service to the desktop, with gigabit Ethernet aggregation within and between buildings (b) Assume that wide area bandwidth demand will double every twelve to eighteen months
Third Component. A third component of the vision relates to access from outside school hours. 4J needs to be planning for offsite access via dialup modem (and eventually via DSL, and cable modem). We assume an initial modem build out at the ratio of 1 modem per twenty students, i.e., a minimum of 900 initial modems. We assume that modems are deployed in banks of 96 modems per bank, each bank costs $30K in non-recurring costs, and each line runs roughly $45/month. Rounding up, then, estimates are: 10 X $30,000 = $300,000 nonrecurring costs 96 X 45 X 12 = $518,400 annually recurring costs
COMPONENT THREE: $818,400 in year one, and $518,400 in years 2 and later for 960 dial-in modems and the lines they will require. Fourth Component. We also know that students and instructors will require some host-based services such as email, and a system where they can publish materials on the Internet (i.e., offer web pages). While those systems can be deployed in a variety of different ways, calculations will assume a large central system, i.e., a Sun Enterprise 5500 running Solaris, as the base. The exact cost of such a system will vary greatly depending on how many processors and how disk and memory are configured onto it, but target price of $200,000 seems reasonable for that system. Assume it requires replacement (as the desktop systems do) every three years.
COMPONENT FOUR: $200,000 in year one, with accumulation of a replacement reserve of one third of that amount each year thereafter, to fund the cost of a large shared host system for e-mail and web publishing. Fifth Component. It also takes staff to install, maintain and operate the above equipment, and to work with users. We can assume that target staffing levels are no more than 250 users to one, or 72 staff members overall. We can also assume that target salary levels (including benefits) are order of $50,000 per person. That implies an annual salary cost associated with supporting the technology of: 18000/250$50,000=$3,600,000/year ongoing
COMPONENT FIVE: $3,600,000/year ongoing for staff funding.
Just considering those core areas, totals are as follows: COMPONENT: ONE TIME RECURRING ------------------------------------------------------ 1. Workstations $2,250,000 2. Networking *$666,000 3. Modems $300,000 $518,400 4. Large system $200,000 $66,000 5. Staff $3,600,000 ---------------------------------------------------------------- $500,000 $7,100,400
*Note that wide area networking costs will increase dramatically and have the potential to dominate other costs in the long term. Beyond these baseline expenditures, are truly progressive items such as: Add On One: The most progressive cities are deploying fiber to the home, or fiber to the curb. Assume that this would cost on order of $1000-$1200 per house, if done on a large scale/efficient basis (rather than on a one-at-a-time inefficient basis). Add On Two: The school of the future, it will be looking at producing (rather than merely consuming) content. For example, the school of the future may want to consider producing CD-ROM- or DVD-based instructional products covering specific subject areas (such as high school French or introductory Chemistry). Assume that each title would cost approximately $100,000. It would be ideal if those DVD's were multilingual/international so that they could be used with audiences whose first language is not English. Note that we have not considered administrative computing requirements, nor telephone costs, nor video-related technology requirements. Depending on the extent to which the vision shows these items converging, the costs shown above might be substantially understated; on the other hand the net cost to the district might decrease if those technology components can be profitably unified. Leasing As A Financing Option for Information Technology Expenditures During a session for public comment, one participant suggested that 4J consider leasing as a financing option for its educational technology requirements. This section is intended to follow up on that comment. Background. Lease financing is a well-understood and common topic covered in most basic financial management texts. For a fairly standard treatment, see Eugene F. Brigham, Financial Management: Theory and Practice, CBS College Publishing/Dryden Press, NY. Quoting Brigham: "... a lease is comparable to a loan in the sense that the firm is required to make a specified series of payments and that a failure to meet these payments will result in bankruptcy. Thus, the most appropriate comparison is the cost of lease financing vs. the cost of debt financing." What, then is the material difference between lease financing and debt financing? Again quoting Brigham: "Tax considerations -- the investment tax credit and accelerated depreciation -- are without question the dominant motives behind most financial leases that are written today." Put differently, leases may make sense when there are tax benefits associated with a purchase that cannot be exploited by the party obtaining leased equipment, but which can be used by the party providing the leased equipment. Other 'Benefits': Leasing companies are fond of noting other 'benefits' however. For example, http://www.computer-finance.com/Why_Financing_/why_financing_.html. This site states that computer financing can do the following [our rejoinders are in square brackets in each case]: "-- Lower your monthly payments: Financing breaks the cash price down into affordable monthly payments and there's no down payment!" - [but that's just like purchasing equipment using debt financing] "-- Provides a tremendous tax advantage: Your company can deduct 100% of the monthly lease payments for tax purposes." [But note that 4J isn't subject to taxation the way a corporation would be] "-- Provides off-balance sheet financing: Financing is an additional source of funds for you. It leaves your vital cash and bank line of credit fully available for other needs." [But FASB #13, "Accounting for Leases" spells out in details how leases need to be treated to avoid misleading balance sheet presentation, and Brigham notes that "leasing is not likely to permit a firm to use more financial leverage than could be obtained with conventional debt."] "-- Protect against obsolescence: At the end of the lease, you can simply return the equipment, choose to buy the equipment or to continue the finance month to month. You are never 'locked into' outdated hardware." [Nor are you 'locked into' outdated hardware purchased outright or purchased via debt financing: you can sell that hardware on the used market, repurpose that equipment, or dispose of it if it has nil residual value.] "-- Allow you to bundle all of your computer technology needs into a single payment: Unlike many other computer financing programs, our program allows you to include everything in the finance -- equipment, including software, maintenance, supplies, installation, etc." [I don't believe that 4J would be overwhelmed by the complexity associated with handling a procurement that potentially involved multiple vendors; this might be true for smaller enterprises, but 4J routinely purchases myriad items from multiple vendors, and even if finding a single integrated package was important, that's something that can be obtained from various vendors regardless of how that purchase is financed.] "-- Provide a hedge against inflation: You acquire today's equipment with tomorrow's cheaper dollars. You know exactly what your monthly cash outlay will be for the duration of the finance." [You may be paying for today's equipment with "tomorrow's cheaper dollars" but the discounted value of those future payments has ABSOLUTELY been folded into the magnitude of the payments you'll be contracting to make. There is no free lunch, and leasing companies are definitely going to correctly account for the time-discounted value of future payments!] We are particularly adamant in recommending that 4J not proceed to enter into what are sometimes called 'technology refresh' financing programs. Those programs are customarily structured to require the participating institution to surrender existing systems as an integral part of receiving current generation systems. As such, those programs deprive 4J of opportunities to push down older (but still functional systems) for less demanding applications at the time that new systems are acquired. We agree with the comments of several panelists at last evening's input session that not all 4J computer users need have absolutely cutting edge technology; pushing down systems at the end of a three-year life cycle (rather than returning those systems to their vendor) insures that maximum residual value is received. 'Technology Refresh' financing completely removes those aging, but still usable, systems from 4J's equipment pool. It is also our general belief that 4J should avoid leasing (just as it should avoid employing debt financing for funding educational technology expenditures). Educational Technology capital expenditures should be treated just as other capital expenditures are treated by 4J, with suitable reserve accumulation requirements designed to insure that replacement can occur on a fully funded sound financial basis at the end of the equipment's estimated life, e.g., on a three-year life cycle basis for most desktop computer systems.
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Eugene School District 4J