Cost-benefit analysis (CBA) is a systematic process used to evaluate the strengths and weaknesses of alternatives by comparing the total expected costs against the total expected benefits of a decision, project, or policy. It helps determine whether the benefits outweigh the costs and thus if the option is worthwhile to pursue
. Key aspects of cost-benefit analysis include:
- Assigning monetary values to both tangible and intangible costs and benefits, such as labor, materials, time savings, quality improvements, or customer satisfaction
- Adjusting for the time value of money by expressing all costs and benefits on a common basis, often using net present value calculations
- Considering opportunity costs, which represent the benefits foregone by choosing one option over another
- Supporting decision-making in various contexts like business projects, public policy, resource allocation, and risk management
The typical steps in conducting a CBA are:
- Clearly defining the project or decision to be evaluated.
- Listing all associated costs and benefits, both direct and indirect.
- Assigning monetary values to these costs and benefits, including intangible factors when possible.
- Comparing total costs and benefits to calculate net benefits or cost-benefit ratios.
- Using the results to decide whether to proceed, modify, or reject the project
Overall, cost-benefit analysis is a vital tool for making informed, data- driven decisions by quantifying and comparing the economic efficiency of different options
