Benefit Cost Analysis

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Benefit Cost Analysis - short version

An examination of the relationship between the monetary cost of implementing an improvement and the monetary value of the benefits achieved by the improvement, both within the same time period.

Benefit Cost Analysis - long version

Cost–benefit analysis (CBA), sometimes called benefit–cost analysis (BCA), is a systematic process for calculating and comparing benefits and costs of a project for two purposes: (1) to determine if it is a sound investment (justification/feasibility), (2) to see how it compares with alternate projects (ranking/priority assignment). It involves comparing the total expected cost of each option against the total expected benefits, to see whether the benefits outweigh the costs, and by how much.

CBA is related to, but distinct from cost-effectiveness analysis. In CBA, benefits and costs are expressed in money 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 "present value."

Closely related, but slightly different, formal techniques include cost-effectiveness analysis, cost–utility analysis, economic impact analysis, fiscal impact analysis and Social Return on Investment (SROI) analysis.

Cost–benefit analysis is often used by governments and others, e.g. businesses, to evaluate the desirability of a given intervention. It is an analysis of the cost effectiveness of different alternatives in order to see whether the benefits outweigh the costs (i.e. whether it is worth intervening at all), and by how much (i.e. which intervention to choose). The aim is to gauge the efficiency of the interventions relative to each other and the status quo. It is with altering the status quo that pareto efficiency is applied in order to achieve best outcomes. The following is a list of steps that comprise a generic cost benefit analysis.

1) Establish alternative projects/programs

2) Compile a list of key players (those with standing or influence)

3) Select measurement and collect all cost and benefits elements

4) Predict outcome of cost and benefits over the duration of the project

5) Put all effects of costs and benefits in dollars

6) Apply discount rate

7) Calculate net present value of project options

8) Sensitivity analysis

9) Recommendation


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