Valuation Method

Calculation of Cost per Life (CPL)

The Microcredit Clearinghouse deals only with projects causing enough change in people\'s lives for them to actually experience long-term improvement. Change may occur in the form of permanent increased income, improvement in health, job training, and a myriad of other ways. In an effort to compare the costs of different programs, the Clearinghouse uses a method it calls Cost per Life or "CPL". This is the cost to cause one person to experience long-term improvement in their life. Since a main benefit of microcredit is the re-loaning of money, the calculation of CPL is done over both one-year and ten-year time frames.

The method is based on the assumption it takes five "life change units" ("LCU") to change a borrower\'s life enough to consider long-term improvement takes place. It also assumes borrowers have an average of five family members. Therefore, it takes one LCU to change one life.

The Clearinghouse method assigns one LCU for each significant service or event. For instance, a microloan, significant job training, or a savings account opened would qualify to receive an LCU. Other types of services are assigned a full LCU or a fraction of an LCU based on their importance (see following table for some examples). As an example, we assume that five lives are changed by a borrower receiving three microloans, receiving job training, and opening a savings account.

The above list is not comprehensive. As an example, a particular project may receive only a partial LCU based on the proposal; i.e. four weeks of job training may receive a full LCU, while an afternoon seminar might not receive anything or maybe .25 of an LCU. Alternatively, a very lengthy program might receive 2 or 3 LCUs

In essence, we want each project to fairly represent how many LCUs are triggered by a donor\'s grant or loan. Part of that process is fairly representing how many other dollars may be accessed, i.e. commercial loans or matching funds. The LCUs triggered by those dollars are included in the project evaluation (see examples below).

The other important component in calculating CPL is the total cost of the project ("Cost"). There are two factors which make this complicated. First, a grant or a loan could trigger additional funding from another source. In that case, the LCUs resulting from the amounts triggered are included in the projected results of a project. So, the benefit of financial leverage is included.

Second, and more difficult, is comparing a loan to a grant. A loan has both carrying costs and risk of repayment involved. Since it is impossible to assess the impact of those two factors on a case by case basis, we arbitrarily assign a 50% cost to all loans, i.e. if the loan is for $500,000 then a Cost of $250,000 is used to calculate CPL. If a loan is involved in a project you are considering, you should assess your own cost factor. Although loans help lower the CPL, it may increase the risk to the project and the organization.

Finally, the calculation of CPL is:

CPL = (Cost of the project) ÷ (Number of LCU’s caused by the Project)

Example 1:

Assume a $200,000 grant is used solely to increase a loan portfolio of an existing sustainable office which offers no other services. Over ten years, the loans will circulate 20 times, for a total of $4,000,000 of loans. If the loan sizes average $100 each, then 40,000 loans would be made (40,000 LCUs).

10 year CPL = ($200,000) ÷ (40,000) = $5.00

Example 2:

Assume a $200,000 grant triggers $2,000,000 in commercial loans for a ten year period. Over ten years this results in $30,000,000 of microloans – or 300,000 microloans averaging $100 each (300,000 LCUs). In addition, 20,000 people receive job training (20,000 LCUs), 50,000 savings accounts are opened (50,000 LCUs) and 20,000 people take out insurance (10,000 LCUs).

10 year CPL = ($200,000) ÷ (300,000 + 20,000 + 50,000 + 10,000) = $0.53