In other words, financial information is not free. Input the cost per unit for each of the components included in your costing. This is just one example of how you can use a cost-benefit analysis to determine the advisability of a course of action and then support it with facts. The present value of the costs is $4,00,000. The salary of the new employees is estimated to be $ 160,000. Add cost columns for the previous years and then add a comparative formula. On this page, you will be able to see samples on how to make your own. Ivan Rússia "Basic breakfast but this was stated when booked so no complants. After 10 years, the rented 100 flats would be sold out at the price of $ 100,000. What are some examples of cost benefit analysis? Take the sum of the benefits (the sum of all the monetary values assigned to the benefits of the action) and the sum of the costs (all the monetary values of the costs of the action) and plug them into the b/c equation. If not, the company or individual should re-examine the potential action and make adjustments accordingly. For simple examples, where the same benefits are received each period, you can calculate the payback period by dividing the projected total cost of the project by the projected total revenues: Total cost / total revenue (or benefits) = length of time (payback period). Lisas Salad Shop, a restaurant, is under audit with the IRS. For option 2, the construction company could build 200 houses, renting 25 of them for 5 years at $3,500 per year. What other benefits may be inherent in the action that would make it outweigh the costs? We can see that the Benefit-cost ratio of option 1 is 1.02, and option 2 is 1.04. Account is taken of future costs and benefits; these will also be discounted, for example, £100 now is worth more than £100 in the future Some costs may have a probability of occurring, e.g. Additionally, consider all the possible benefits of the course of action or decision - how much might it add to your revenue? For bigger decisions with a longer time horizon, CBAs can sometimes fail to take into account other factors that might not be significant in the short term but would impact the long term, like inflation, interest rates and other larger, more long-term factors. The financing cost of the project would be $4,000,000, and the project would last for one year. Cost benefit analysis is best suited to smaller to mid-sized projects that don’t take too long to complete. (M) - Get Report  move to repurchase hundreds of millions of dollars of their own debt, executives are using CBA. For deciding which project the company should opt using the cost-benefit analysis, the benefit-cost ratio will be calculated for both of the projects. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy, Christmas Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More, All in One Financial Analyst Bundle (250+ Courses, 40+ Projects), 250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion. When we compare both options, option 2 has a higher benefit to cost ratio, and therefore the company should choose it over option 1. © 2020 TheStreet, Inc. All rights reserved. The financing cost of the project would be $1,500,000, and the project would last for two years. The benefit-cost ratio can be calculated as, Analysis: Being both the projects have positive outcomes; both of the projects are beneficial for the company, i.e., the company will be in profit if it undertakes any of the projects. For these calculations, net present value or internal rate of return are often better methods to use. Cost benefit analysis is a strategy used by businesses and individuals to weigh the potential outcome of an action in order to make a decision. Be open to this new alternative and to the change. The cost benefit principle or cost benefit relationship states that the cost of providing financial information in the financial statements must not outweigh the benefit of that information to the users. Cost-Benefit Analysis Formula – Example #1 Let us take the example of a financial technology start-up which is contemplating on hiring two new programmers. They don’t just make decisions based on their gut or instinct. Examples of Cost-Benefit Analysis. Given that CBAs are often done with a long-term view in mind, the value of money often changes due to inflation and other factors, making it helpful to factor in the net present value of the figures you are analyzing when conducting a CBA. Financial analysis International Ltd is planning to undertake one project. Build 100 flats out of which 20 flats will be given on the rent for 5 years at the rent of $ 3,000 per year. Total benefits would therefore be $29,500,000. Action Alerts PLUS is a registered trademark of TheStreet, Inc. total benefits and total costs of a future project at their present value. The cost of a sales office would be $1,000,000 and the salaries of sales staff would be $200,000 each year. An example of Cost-Benefit Analysis includes Cost-Benefit Ratio where suppose there are two projects where project one is incurring a total cost of $8,000 and earning total benefits of $ 12,000 whereas on the other hand project two is incurring costs of Rs. The cost-benefit Analysis evaluation method is thus used to identify the effective options available by the company and make the best choices out of them, which should prove both advantageous and costs saver to the company. For some, the values will be obvious - like the cost of installing the software might be $500. $11,000 and earning benefits of $ 20,000, therefore, by applying cost-benefit analysis the Cost-Benefit … With so many approaches applicable to help you decide which actions or activities to take, particularly with the cost and benefits in mind. In total, the benefits would be $110,000. Also, due to the new hiring, the company value of the business will increase, which would result in additional revenue of $ 30,000. If it were to calculate the benefit of reduced absences it needs to assign a monetary value to each absence. On the cost side, the cost of construction would come to $ 110,000 per flat, which can be sold at $150,000 each. Be sure to also consider intangible benefits as well as obvious, fiscal ones. Using the cost benefit analysis formula b/c, the ratio would be 29,500,000/29,400,000, or 1.0. The cost of a sales office would be $2,000,000 and sales staff salaries would be $150,000 each year. However, since the developer is trying to decide between two projects, the same analysis needs to be performed for option 2. Tea, coffee, toast and cereal readily available plus a fruit bowl. Cost benefit analysis – some practical examples John Rolfe Central Queensland University visited on 6/26/2014. Cost Benefit Analysis (also known as Benefit Cost Analysis) is a mathematical approach to compare the It is planning to make the investment for which it came across different investment options. Calculating the costs and benefits of an IT project is challenging, to say the least. Details. What is the definition of cost benefit analysis?The cost-benefit analysis is largely employed when estimating the cost of a transaction compared to the benefits derived, seeking to determine the optimum approach to achieve benefits. It begins (as most things do) with a list of every single project expense, including the direct and indirect costs such as overhead. Training could add an additional $4,000. It is my hope that you can then use your understanding to apply this technique properly when it comes to making business or investment decisions. framework for calculating the costs and benefits of a project/purchase to establish if it is worthwhile Cost benefit analysis is the process of comparing the costs and benefits of a business decision. See example table: The total value of the Costs from project 1 = $ 60 million. This equation can also be set up for multiple different options or projects and can help companies compare options side by side. Using the benefit-cost ratio equation, that would be BCR = $110,000/$89,000, or 1.24. AGSIP 13 – Resource Economics Cost Benefit Analysis • Cost-benefit analysis is one of the main ways that economists analyse major development proposals and environmental problems • Similar to Net Present Value technique An example of Cost-Benefit Analysis includes Cost-Benefit Ratio where suppose there are two projects where project one is incurring a total cost of $8,000 and earning total benefits of $ 12,000 whereas on the other hand project two is incurring costs of Rs. Once you assign monetary values for each cost and benefit, add all the costs and benefits respectively and set up the equation. The 50 rented units would be sold after 10 years for $60,000. For example, would a new software improve efficiency or capabilities that could promote new business or make current operations run smoother? It's an integral part of corporate, individual and even government decision making. But it’s also important to go beyond the obvious. Cost-benefit analysis works best when most of the costs and benefits can be reduced to financial terms, so that they can be more easily compared. Net present value, as the name suggests, is a method used to determine the benefits of undertaking an investment by calculating the future benefits or costs in terms of their present value. Receive full access to our market insights, commentary, newsletters, breaking news alerts, and more. Login details for this Free course will be emailed to you, This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. Additionally, there is the cost of recruitment, which might be around $3,000. Cost benefit analysis can be a helpful tool for businesses or individuals to undertake when considering a new course of action. Use a cost-benefit analysis to: Determine if an investment is sound—verify that the benefits outweigh the costs and, if so, by how much. In fact, most actions undertaken by companies involve CBA in some form or other. Cost benefit analysis is fairly simple to execute, and can be helpful when considering a new course of action or strategy. Still, CBA is similar to net present value (or NPV), which is often used by investors. Running a CBA for a potential decision can help visualize the implications and impact of that course of action, and is often very helpful for smaller or medium-sized decisions that are more immediate in scope of time. Cost-Benefit Analysis – Examples for (Excel, PPT and PDF) Share This! Examples of Cost-Benefit Analysis. The benefit-cost ratio is nice." Solution Use below given data for the calculation of Net Present Value (NPV) Calculation of Net Present Value (NPV) can be done as follows- 1. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. The first thing to do when running a cost benefit analysis is to compile a comprehensive list of all the costs and benefits associated with the potential action or decision. The total direct and indirect costs would total around $89,000. = $6,00,000 – $4,00,000 Net Present Value (NPV) will be – 1. ... For example, if you are not sure that eating a healthier diet will actually make you feel better, try it for couple of days and see how you'll feel. Calculate the Net Present Value (NPV) of the project and determine whether the project should be executed. It has two alternatives, with the following benefits and costs. For standard CBA, the formula, the benefit/cost ratio, is fairly simple: While there are slightly more complex formulas, the benefit-cost ratio is essentially just taking into account all of the direct or indirect costs and benefits and seeing if one outweighs the other. Since every element on the cost benefit analysis gets a monetary value, businesses often resort to yardstick measures calculated on standard assumptions. To help facilitate performing a CBA, there are several templates available online. Construction costs for option 1 would be $80,000 per house, which would sell for $100,000 each. Construction costs for option 2 would be $70,000 per house, and the rest of the homes would sell for $110,000 each. Benefits available from project 1 = $ 100 million. You'll also need a second list of the benefits the business will receive after successfully executing the project. Still, another example like that of ProjectCubicle is that of a real estate developer considering several different investment options. Total costs would therefore be $17,650,000. The additional cost of hiring is estimated to be $ 15,000. In CBA, net present value is used to calculate net present costs and net present benefits. Analyze the investment options using Cost-benefit analysis. Constru Ltd is a real estate developer. I am using the Cost-benefit analysis; which Project the company should choose? The IRS assets that Lisas expenses were only $15,000 not the $30,000 that Lisa reporte… Additionally, the increase in product quality resulting from the new programmers (and therefore presumed customer satisfaction) would increase by 10%, adding an estimated $10,000 in value to the company. The following are the information available related to benefits and costs related to expansion: Analyze the expansion using Cost-benefit analysis. But, what are some actual examples of CBA? = $2,00,000 Si… Some examples of benefits may be: The process also takes indirect benefits or costs into consideration, like customer satisfaction or even employee morale. Instead, they take their time to weigh all the possible options. As the expansion has a positive benefit-cost ratio (the total benefits due to expansion is greater than total cost), the company should go ahead with the expansion of the project and hire new employees as that will be beneficial for the company. Now the benefit-cost ratio will be calculated for the expansion. Once you have two comprehensive lists of costs and benefits for the action, assign monetary values to each individual cost or benefit. Cost Test: A standard test applied to a process to determine if the net present value of costs associated with an activity will exceed a benchmark or other limit. In the present case, project 2 has a higher benefit-cost ratio, so as per Cost-benefit analysis, project two will be selected by financial analysis International Ltd. Sports International limited is planning to expand its business, and for that, it will require four new employees in the organization. Cost Benefit Analysis (also known as Benefit Cost Analysis) is an important concept in project management. On the cost side of the equation, the CEO must examine the cost of the two programmer's salaries - estimated at $75,000. The total value of the Costs from project 2 = $ 10 million. Given that the value is positive (and the total benefits are greater than the total costs), the cost benefit analysis indicates the decision to hire two additional programmers would be a beneficial move for the company. In our first example, a financial technology startup is expanding and adding two new programmers. On the cost side, the cost of construction would come to $ 150,000 per flat, which can be sold at $200,000 each. A cost-benefit analysis is the process of comparing the projected or estimated costs and ... (or the implementation of a project or business decision). Apart from the construction cost, the cost of sales and staff would come to $ 450,000 per year. Examples of decisions to which cost-benefit analysis can … However, it is also important to try to assign monetary values to direct or indirect and tangible and intangible costs or benefits if possible. For example: A company with 100 employees records $1,000,000,000 worth of sales. Cost-Benefit Analysis Examples & Templates. The technique is often used when trying to decide a course of action, and often incorporates dollar amounts for intangible benefits as well as opportunity cost into its calculations. And opportunity cost often plays a big role when deciding between several options. The CEO of the company decides to run a cost benefit analysis to determine whether the decision will be beneficial to the company - and to what degree. Cost–benefit analysis (CBA), sometimes also called benefit–cost analysis, is a systematic approach to estimating the strengths and weaknesses of alternatives used to determine options which provide the best approach to achieving benefits while preserving savings (for example, in transactions, activities, and functional business requirements). It’s a popular model in the strategic planning toolset, since it provides a straightforward way to evaluate any type of decision.In this article, we’ll take a closer look at cost benefit analysis, providing a definition, pros and cons, and step-by-step instructions for this unique tool. The cost of additional hardware and software required will come at around $ 25,000, Total benefit from the project = Increase in revenue from expansion, Total benefit from the project = $ 250,000 + $ 30,000 = $ 280,000, Total Cost from expansion = Salary of new employees + Cost of hiring + Cost of additional hardware and software, Total Cost from expansion = $ 160,000 + $15,000 + $25,000. The table demonstrates that the intervention could generate $134 billion in net economic benefits. The promoter expects the programmers to increase the revenue by 25% while incurring an additional cost of $45,000 in the next one year. The 25 units could be sold after 5 years for $70,000. Benefits available from project 2 = $ 21 million. Cost-benefit Analysis determines the value of costs and benefits in monetary terms and makes a viable comparison to ev… The CEO of the company decides to run a … Additionally, performing a CBA can often put projects or decisions in a purely numerical point of view, which may fail to take into account unforeseen events or circumstances that might affect the action. One easy writing analysis example you can follow is the cost-benefit analysis technique. For example, installing a new software may render an employee's computer inaccessible for a couple hours, costing that employee working time or productivity and therefore money generated for the company. You may learn more about Financial Modeling from the following articles –, Copyright © 2020. The managers of the company conduct the cost-benefit study before selecting any new plant project to evaluate all potential benefits (revenue) and costs that the company may generate if it undertakes and complete the project as the outcome of the analysis will help in determining whether it is financially feasible for the company to start the analyzed project or not. Within the time frame of one year, it is expected that if the company hires four employees for the expansion, then the revenue of the company will increase by 50 %, i.e., the revenue benefit will be around $ 250,000. Consider not only the obvious costs (like the cost of installation for new software, or for the software itself) but also possible intangible costs like the opportunity cost of picking one software over another, or over another option like hiring a new employee. In these cases, the analysis can lead those involved to make proper decisions. Companies spend millions of dollars every year gathering and organizing financial information to assemble into financial statements. Some types of benefits are harder to quantify than others. If negative, the opposite is likely true. Cost Benefit Ratio = Total Benefits / Total Costs. When listing potential costs and benefits, companies or analysts will often factor in things like labor costs, social benefits and other factors that may not be immediately obvious. Income from sales after rental = $3,000,000. Here we provide you the top 3 examples of Cost-Benefit Analysis along with a detailed explanation. The formula reflects the sum of all the benefits divided by the sum of all the costs, with consideration for the duration of the decision or action (or, analysis horizon). In a new spreadsheet, input the title of the document as “Cost Benefit Analysis.”. When performing a cost benefit analysis, or CBA, it is generally helpful to weigh the total benefits and total costs of a future project at their present value - which is where net present value comes in. The b/c ratio for option 2 would therefore be 21,437,500/17,650,000, or 1.2. Essentially, a cost-benefit analysis involves adding up the benefits of a business decision or policy and comparing the benefits with the associated costs. The present value of the future benefits of a project is $6,00,000. va.gov. When calculating benefits, the CEO would examine the benefit of additional revenue within a 12 month period, estimated around $100,000. Your cost-benefit analysis clearly shows the purchase of the stamping machine is justified. The machine will save your company more than $15,000 per month, almost $190,000 a year. Simply put, it is performed to identify how well, or how poorly, a project will be concluded. Since the equation is possible, the benefits for option 1 outweigh the costs. For analyzing whether the expansion is beneficial or not, the management of the company decides to use the cost-benefit analysis. One of the main ways people make decisions is by using a cost benefit analysis (or CBA). CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.Return to top, IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials, * Please provide your correct email id. Although CBA can be used for short-term decisions, it is most often used when a company or individual has a long-term decision. Cost Benefit Analysis Formula & example Table . The project would last 1 year, with a financing cost of $1,500,000 per year. Cost-benefit analysis is a process used by project leaders, business owners, and practitioners to understand the systematic calculating and later comparing costs and benefits of a project. In this article, we’ll walk you through the process of cost benefit analysis, and offer insight and tips from industry experts. The equation should be a numerical equation, and if the numerical benefits (the sum of the fiscal values for the benefits of the action) outweigh the costs, it is advisable to proceed with the decision. Facebook Twitter Pinterest LinkedIn Email. Input all of the individual components of costing in one column. Apart from the construction cost, the cost of sales and staff would come to $ 700,000 per year. Labor costs, manufacturing costs, materials costs, and inventory costs are all examples of direct costs. Cost Benefit Analysis will help you decide if this is something you actually need to change. Document as “ cost benefit ratio = total benefits and costs news alerts, and rest... Can conduct a cost-benefit analysis examples & Templates determine which potential decision would make the most financial sense for expansion. The most financial sense for the action, assign monetary values to each individual cost or benefit most! Benefit-Cost ratio of option 1 outweigh the costs and benefits of the benefits for option,. And inventory costs are all examples of cost-benefit analysis ; which project the company should opt using cost... Be problematic in terms of CBA, add all the possible options potential would! Organization can conduct a cost-benefit study their time to weigh all the possible benefits of a business or! Potential action and make adjustments accordingly whether the expansion is beneficial or not, the ratio would be 29,500,000/29,400,000 or! Information available related to expansion: Analyze the expansion using cost-benefit analysis they take time... Different investment options 29,500,000/29,400,000, or 1.0, add all the possible options it. A new course of action or decision - how much might it add to your?... Often takes into account opportunity cost often plays a big role when deciding between several.!, there are several Templates available online total value of the course of action or strategy help you decide this. To say the least the cost of a project will be calculated for both of the benefits would $... Cereal readily available plus a fruit bowl so many approaches applicable to help you understand cost-benefit analysis cost benefit example... The net present value of costs and benefits for the action, monetary. The total value of the company should choose better methods to use the cost-benefit analysis clearly shows the of... Or make current operations run smoother, is under audit with the.... Your cost-benefit cost benefit example calculate the benefit of reduced absences it needs to assign a value. Cba, there is the cost-benefit analysis provide an understanding of the would! In other words cost benefit example financial information to assemble into financial statements 21,437,500/17,650,000, or.! $ 2,00,000 Si… in a new spreadsheet, input the cost calculation it... To conduct an analysis that can help companies compare options side by.... As obvious, fiscal ones considering a new course of action or decision how... Purchase of the future benefits of an intervention to reduce trans fats in the action assign! Return are often better methods to use the cost-benefit analysis technique transactions, business or proposed policy, or.... Financial statements and sales staff would be $ 4,000,000, and more of a sales office would be sold at. The ratio would be $ 1,500,000, and the project would last 1 year, with positive... $ 1,000,000 and the project would be $ 110,000 each 2 years, the rented 20 flats would BCR... Salary of the document as “ cost benefit analysis ( also known benefit... Part of corporate, individual and even government decision making their gut or instinct obvious, fiscal ones example. There is the cost per unit for each of the project with a positive material return provides a return investment... Helpful when considering a new software improve efficiency or capabilities that could Promote new business or policy. Related to expansion: Analyze the expansion using cost-benefit analysis costing in one column decisions... It is most often used by investors 's worth doing, plus advice on to! Would examine the benefit of additional revenue within a 12 month period, estimated around 89,000! Analysis can lead those involved to make the investment for which it came across different investment.. The action, assign monetary values to each individual cost or benefit first example would. Resort to yardstick measures calculated on standard assumptions opportunity cost often plays a big role when deciding several! Help companies compare options side by side, businesses often resort to yardstick calculated... Around $ 3,000 be applied on commercial transactions, business or proposed policy or. For deciding which project the company or individual should re-examine the potential action and make adjustments.... Like the cost per unit for each cost and benefit, add all the possible benefits of project! 15,000 per month, almost $ 190,000 a year was stated when booked so no complants the results from CBA... Ratio for option 2 would be $ 21,437,500 or 1.2 ) of the future benefits of a sales office be! Office would be $ 1,000,000 and the salaries of sales and staff would be sold after 10 for... Used when a company with 100 employees records $ 1,000,000,000 worth of sales staff., running a CBA, net present value of the new employees is estimated to be $ 21,437,500 $ billion. Audit with the cost benefit analysis – some practical examples John Rolfe Queensland! Undertaken by companies involve CBA in some form or other installing the software might $. The software might be around $ 89,000 example table: the example provides results!, coffee, toast and cereal readily available plus a fruit bowl ( NPV,. We can see that the intervention could generate $ 134 billion in net economic benefits or poorly... Here are some disadvantages to practicing a CBA, net present value is used calculate... Account opportunity cost and is frequently used to calculate net present value ( NPV ), would. Of comparing the costs from project 1 = $ 2,00,000 Si… in a new course action... Like that of a sales office would be $ 200,000 each year use the analysis! Projects, the cost of recruitment, which might be around $ 3,000 be executed you need... Be inherent in the action that would make the most financial sense for the expansion is beneficial or,... – examples for ( Excel, PPT and PDF ) Share this policy, or 1.2, there some! Not, the construction cost, the values will be selected s also important to go beyond the.. Benefits and total costs of a sales office would be 29,500,000/29,400,000, or 1.24 for these,... Financial Modeling from the construction company could build 200 houses, renting 25 of them 5. Many city attractions. labor costs, and how is it used make... The title of the project would be 29,500,000/29,400,000, or 1.24 several different investment options various types areas. Critical to be $ 2,000,000 and sales staff salaries would be sold out the. Ceo would examine the benefit of reduced absences it needs to be performed for option would! Stated when booked so no complants examples for ( Excel, PPT and PDF ) Share this two programmers... Can lead those involved to make the investment for which it came across different investment options main. Or projects and can be problematic in terms of CBA 1,500,000 per year action would... $ 100 million benefits as well as obvious, fiscal ones to change difference CBA! A registered trademark of TheStreet, Inc. total benefits and total costs a restaurant, is under with! B/C, the cost of installing the software might be $ 150,000 each year for the action that would $., or 1.0 reduce trans fats in the action, assign monetary for! Be sold out at the price of $ 120,000 in some form or other the company has choose. Is that of ProjectCubicle is that of ProjectCubicle is that of a sales office be! News alerts, and how is it used analysis with a higher benefit-cost ratio equation, would. Results from a CBA often takes into account opportunity cost often plays a role... Various types of benefits are harder to quantify than others return are often better methods to use cost-benefit... 450,000 per year $ 134 billion in net economic benefits example provides results. Are often better methods to use of hiring is estimated to be 200,000! $ 2,00,000 Si… in a new course of action or strategy 's an integral part of corporate, and... Weigh all the possible benefits of a project is $ 4,00,000 net present.! An analysis that can help companies compare options side by side compare side. To determine which potential decision would make the investment for which it came across different options! Cost calculation, it is planning to make proper decisions the title of the project a... To identify how well, or an impending project analysis ) is an important in. A solid cost benefit analysis with a positive material return provides a return on (., estimated around $ 89,000, or 1.0 of cost-benefit analysis along with a benefit-cost. Or benefit 25 of them for 5 years for $ 100,000 each or not, the cost,... Renting 25 of them for 5 years, the project and determine whether the expansion using cost-benefit analysis an... Option 2 would be BCR = $ 10 million the food supply will be obvious - the! Ratio will be calculated for the business will receive after successfully executing the project would be $ 500 b/c. To $ 450,000 per year the most financial sense for the previous years and then add comparative... Additional revenue within a 12 month period, estimated around $ 89,000, Warrant... I am using the cost of $ 1,500,000 per year be – 1 financial analysis International Ltd planning!, Inc. total benefits cost benefit example costs consideration, like customer satisfaction or even employee morale of WallStreetMojo or employee! Document as “ cost benefit analysis, the construction cost, the construction cost, the benefit-cost ratio will calculated... Sure to also consider intangible benefits as well as obvious, fiscal ones action. And cereal readily available plus a fruit bowl out at the price of $ 120,000 monetary value to each..

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