COST BENEFIT ANALYSIS

Introduction
 CBA is a process for evaluating the merits of a particular project in a
systematic way in terms of cost and benefits of the project.

 Cost is the value of money that has been used up to produce something, hence
is not available for use anymore.

 Benefit are the monetary values of desirable consequence of economic

policies and decisions.

 The conceptual and theoretical framework of CBA is derived from welfare

economics.
 COST BENEFIT ANALYSIS

 Cost Benefit Analysis (CBA) is an economic evaluation technique

that measures all the POSITIVE (beneficial) and NEGATIVE
(costly) consequences of an intervention or program in monetary
terms.

 The valuation of all program outcomes in monetary units allows

decision makers to directly compare the outcomes of different types
of interventions.
 COST BENEFIT

Any negative effects on an A benefit is any positive effect on the

organization resulting from the organization resulting from the
implementation of the project. implementation of the project.

Examples: Examples:
1. Maintenance costs 1. Increase in productivity
2. Environment 2. Reduction in costs
3. Research and development 3. Saving time
4. Labour costs
 HISTORY OF CBA

 Dates back to the work of Alfred Marshal

1. One of the founder of neoclassical economics
2. Brings the idea of demand and supply; Marginal utility and cost of
production

 Practical application was initiated in U.S by Corps of Engineers after Federal

Navigation act 1936- flood control

 Later applied in several fields – Highway & Motorway

 PRINCIPLES OF COST BENEFIT ANALYSIS

 There must be a common unit of measurement

 CBA valuations should represents Producers or Consumers

 Benefits are usually measured by Market Choices

 Gross benefits of an increase in consumption is an area under the demand curve

Some measurement of benefits require the valuation of Human Life

CBA involves a particular study area

Double counting of benefits or cost must be avoided.

Decision criteria of projects.

 Key CBA Indicators

NPV ( net present value )

PVB ( present value of benefits )
PVC ( present value of cost )
BCR ( benefit cost ratio = PVB / PVC
Net Benefit = ( PVB – PVC )
NPV/k ( where k is the level of funds available)
 Challenges of CBA

Accuracy problem

1. Inaccurate cost and benefit estimation

2. Rely heavily on similar projects of past
3. Rely heavily on project members
4. Can’t avoid the unconscious bias of team members

* Determination of which cost to include in the analysis

 Conclusion

 Performing a Cost-Benefit Analysis is critical to the continuation of a

development product.

 Superficial attention to its development may result in erroneous conclusions

which will lead to a company down a path to disaster.

 It is important that both costs and benefits be thoroughly defined and

scrutinized.