Cost-Benefit Analysis: A process against expected benefits by which you weigh expected costs to determine the best (or most profitable) course of action known as cost-benefit analysis. Cost Benefit Analysis is a process where can you consider expected costs against expected benefits to determine the best course of action.

What is Cost-Benefit Analysis? History and Limitations of Cost-Benefit Analysis

Cost-benefit analysis helps you to decide just which route is best for you when comes to goal setting or knowing on the best plan of attack. And this hasn’t have complicated. You only draw a vertical line in the middle of the paper to make it two columns. So, now on the left side, note the benefits of achieving a given goal. And, on the right, just list what it costs to get there. If you have done with that just add up the benefits and costs columns and then watch which has more or provide weighted scores to each entry and have total at the bottom. You don’t want to have quick and easy analysis make the final decision for you. The simple cost-benefit review gives an idea for you whether a given goal is worth investigating further.

Take an example to get that a sales director who wants to decide whether to execute a new computer-based contact management and also sales processing system. Only a few computers the sales department having and salespeople aren’t computer savvy. And during the transition period, the company likely to experience a drop in sales.

And estimated to have $55,800 while including total expenses, equipment, installation and training costs, plus lost productivity. Also, the new computer system would increase sales capacity by the company, boost efficiency and enhance customer service and financial retention benefits the company pegs at $90,000 annually. The company see a return on its investment in eight months based on the cost-benefit estimates.

Breaking down the Cost-Benefit Analysis:

Prudent managers manage a cost-benefit analysis as a means of evaluating all the potential costs and revenues before erecting a new plant or taking on a new project that may have generated if the project has completed. And the analysis outcome determines whether the plan is financially feasible or if another project should have pursued.

Cost-Benefit Analysis Limitation:

The projects involving small to mid-level capital expenditures and has short to intermediate regarding time to finish, an in-depth cost-benefit analysis may have sufficient enough to make a well informed rational decision.
With a long-term horizon for every massive project, cost-benefit analysis typically fails to take into account critical financial concerns like inflation, interest rates, varying cash flows and the present value of money.
For these situations, alternative capital budgeting analysis methods including net present value or internal rate of return are appropriate.

Cost-Benefit Analysis history:

In the water development projects of the US Army Corps of Engineers, CBA has its origins. In the American Revolution, the corps of Engineers had its roots in the French engineers hired by George Washington. And in the United States, for years the only school of engineering has the Military Academy at West Point, New York.

In 1879, Congress organised the Mississippi River Commission to “prevent destructive floods.” The Commission included civilians, but the president had to have an Army engineer and the Corps of the Engineers always had veto power over any decision by the Commission.

To “prevent destructive floods,” Congress created the Mississippi River Commission in 1879. The civilians had included by the Commission, but the president had to have an Army engineer and the corps of Engineering always had veto power over any decision by the Commission.

A Flood Control Act has passed by the Congress in 1936 which contained the wording, “the Federal Government should improve or improvement of navigating waters or their tributaries, including watersheds thereof, for flood control purposes if the benefits to whomsoever they may accrue have more than the estimated costs.”

Initially, for estimating benefits and costs, the Corps of Engineers developed ad hoc methods. It not until the 1950s for the economic analysis of public investments that academic economists discovered that the Corps had developed a system.

 Accuracy:

Cost-benefit analysis value depends on the accuracy of the individual cost and benefit estimates. Such estimates have often flawed, preventing improvements in Pareto and Kaldor Hicks efficiency, comparative studies indicate. These inaccuracies causes have given below.

  • From the past projects, over-reliance on data.
  • And in assessment, the use of subjective impressions.
  • Heuristics inappropriate use to derive money cost of the intangible elements.
  • Among the project supporters confirmation bias.

From an analysis to influence the outcome, interest groups may attempt to include or exclude significant costs.

The company decision has not issued a recall in the case of the Ford Pinto. Based on the number of cars in use and the probable accident rate, Ford cost-benefit analysis had estimated, deaths due to the design flaw would cost $49.5 million to settle wrongful death claims versus recall costs of $137.5 million.

Some analysts think cost-benefit analysis can have an inadequate measure in health economics because willingness to pay methods of determining the value of human life can have influenced by income level.

Cost-benefit analysis can have substituted with cost-effectiveness analysis for some environmental effects. When there has only one type of physical outcome that has sought, it is correct, such as the decrease of energy use by increasing energy efficiency.

 

LEAVE A REPLY

Please enter your comment!
Please enter your name here