Cost-benefit analysis

Cost-benefit analysis (CBA) is a systematic approach to estimating the strengths and weaknesses of alternatives used to determine options which provide the best approach to achieving benefits while preserving savings. It is commonly used in commercial transactions, business or policy decisions (particularly public policy), and project investments.

Overview

A Cost-benefit analysis involves the calculation and comparison of the costs and benefits of a policy or project. This analysis seeks to determine if the benefits outweigh the costs, and by how much. In essence, a CBA functions as a way to evaluate and compare different options in order to make decisions that provide the maximum net benefit.

Methodology

The process of a cost-benefit analysis involves several steps:

1. Identification of potential costs and benefits: This involves determining all the potential costs and benefits associated with a decision or project.
2. Quantification of costs and benefits: This involves assigning monetary values to the identified costs and benefits.
3. Comparison of costs and benefits: This involves comparing the total expected cost against the total expected benefits of one or more actions in order to choose the most profitable option.

Applications

Cost-benefit analysis is used in a wide range of applications, including:

1. Business decisions: Companies often use cost-benefit analysis to decide whether to pursue a project or decision.
2. Public policy: Governments use cost-benefit analysis to evaluate the desirability of a given intervention. It is heavily used in today's government.
3. Project management: Cost-benefit analysis is often used in project management to decide whether to pursue a project or effort.

Limitations

While cost-benefit analysis can be a useful tool, it is not without its limitations. These include:

1. Difficulty in quantifying benefits: Not all benefits can be easily quantified, especially intangible benefits such as customer satisfaction or increased brand reputation.
2. Subjectivity: The process of assigning monetary values to costs and benefits can be subjective and may vary depending on the perspective of the analyst.
3. Uncertainty: Future costs and benefits can be difficult to predict with certainty.

See also

• Cost-effectiveness analysis
• Cost-utility analysis
• Health economics
• Public finance

References

Cost-benefit analysis Resources
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