Cost-Benefits Analysis
Cost-benefit analysis is an approach for decision making. It is used to determine how well or how poorly a planned action will turn out. It relies on addition of positive factors and the subtraction of negative factors to find a net result. It is also known as the weighing-scale approach. The positive elements are put on one side of the balance and negative elements on the other. Whichever weighs higher wins. It is a simple and widely used technique. It is carried out using financial benefits and financial costs. A simple cost benefit ratio will determine the cost of building road and will subtract this from the gain of improving transport links.
It is used by governments to evaluate the desirability of a given intervention. It is an analysis of cost effectiveness in order to see whether the benefits overshadow the costs. The benefits and costs are calculated in terms of the eagerness to pay for them for the benefits or the eagerness to avoid them due to cost. Inputs are calculated in terms of opportunity costs. Example: a company that would like to buy business intelligence software to improve its business might use a CBA to make up its mind. On the minus side, would be the cost to implement the software, the cost of consultants to install and the price of software. However, the plus side would be improved business processes, better available information, and company will be able to take better decisions and the modern tool will support the business.
There are some problems associated with CBA method. A frequently made mistake in this method is use of non discounted amounts for calculating benefits and costs. Another problem with CBA is that typically the costs are tangible, hard and financial. In strategic investments benefits outweigh the benefits.
Written by: Matt
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