Cost–benefit analysis
Cost–benefit analysis (CBA), sometimes called benefit costsanalysis (BCA), is a systematic approach to estimating the strengths and
weaknesses of alternatives (for example in transactions, activities, functional
business requirements or projects investments); it is used to determine options
that provide the best approach to achieve benefits while preserving savings.[1]
The CBA is also defined as a systematic process for calculating and comparing
benefits and costs of a decision, policy (with particular regard to government
policy) or (in general) project
Broadly, CBA has two main purposes:
To determine if an investment/decision is sound
(justification/feasibility) – verifying whether its benefits outweigh thecosts, and by how much;
To provide a basis for comparing projects – which involves
comparing the total expected cost of each option against its total expected
benefits.[3]
CBA is related to (but distinct from) cost-effectivenessanalysis. In CBA, benefits and costs are expressed in monetary terms, and are
adjusted for the time value of money, so that all flows of benefits and flows
of project costs over time (which tend to occur at different points in time)
are expressed on a common basis in terms of their net present value.
Closely related, but slightly different, formal techniques
include cost-effectiveness analysis, cost–utility analysis, risk–benefitanalysis, economic impact analysis, fiscal impact analysis, and social return
on investment (SROI) analysis.
Theory
Cost–benefit analysis is often used by organizations to
appraise the desirability of a given policy. It is an analysis of the expected
balance of benefits and costs, including an account of foregone alternatives
and the status quo. CBA helps predict whether the benefits of a policy outweigh
its costs, and by how much relative to other alternatives, so that one can rank
alternate policies in terms of the cost–benefit ratio.[4] Generally, accurate
cost–benefit analysis identifies choices that increase welfare from a
utilitarian perspective. Assuming an accurate CBA, changing the status quo by
implementing the alternative with the lowest cost–benefit ratio can improve
Pareto efficiency.[5] While CBA can offer a well-educated estimate of the best
alternative – perfect appraisal of all present and future costs and benefits is
difficult –, perfection in terms of economic efficiency and social welfare are
not guaranteed.[6]
Process[edit]
The following is a list of steps that comprise a generic
cost–benefit analysis.[7]
Define the goals and objectives of the project/activities
List alternative projects/programs.
List stakeholders.
Select measurement(s) and measure all cost/benefit elements.
Predict outcome of cost and benefits over relevant time
period.
Convert all costs and benefits into a common currency.
Apply discount rate.
Calculate net present value of project options.
Perform sensitivity analysis.
Adopt recommended choice.
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