Cost – Benefit analysis is a process by which the decisions made in the businesses are analysed. Cost – business analysis sometimes also known as benefit – cost analysis and in short CBA. With the help of, we can come to know that how well or how poor the action is turned out. It is a systematic approach to quantify the costs and the benefits of a decision or a project over a time period. Performing cost – benefit analysis to any project is critical one. We can estimate the strengths and weaknesses of alternatives which can satisfy the transactions and functional requirements of a business. Cost – Benefit Analysis is done before starting any new project. The prudent managers conduct the analysis to find out the potential risks, costs and benefits which the project over a time can generate. The result of the project decides if the project is financially stable or not. If it is not, then another project can be started.
According to David, Ngulube & Dube, 2013, “cost benefit analysis is a technique which is used to determine the options that can provide the best approach for the adoption and practice in terms of the benefits in labour, time and cost savings.”
The cost benefit analysis system helps in finding, quantifying and adding the positive factors which are the benefits. Then it identifies, quantifies and subtracts all the negatives costs. The resulted difference is then taken into account to know whether the project is advisable or not. The key idea is to ensure that all the costs and benefits are properly included and quantified. Cost benefit analysis includes many factors such as the environmental and social costs and the benefits. These can be reasonably quantified. So, it’s not just restricted to monetary considerations. Cost benefit analysis method is used get the net present value (NPV) of the project by means of discounting the returns and the investments. Cost benefit analysis is used for the calculation and comparison of the costs and the benefits of a project or decision.
Cost – benefit analysis is helpful in the following ways:
- Cost benefit analysis decides if we should undertake any project or not.
- It helps in framing the appropriate project objectives.
- It helps in preparing the resources which are required to perform the project
- It develops the estimate measures of the project.
To appraise the desirability of any project, cost benefit analysis is used by all the government and private organizations. Organizations find out the balance the costs and benefits. Cost benefit analysis determines the investment made is sound or not. For comparing two projects to know which one should be undertaken, it provides a basis by comparing the expected cost of each project undertaken against the total expected benefits. It finds out if the benefit outweighs the costs or not. And if it does then by how much? So, cost benefit analysis depends on the addition of the positive factors and the deletion (subtraction) of negative factors.
Cost Benefit Analysis Process
Cost benefit analysis is the process of making logical decisions. These decisions are based on the probable outcomes of various actions. The cost benefit analysis process follows the followings steps:-
- Possible options for the project/actions are specified. These options are selected in such a way that it becomes impossible to choose more than one option.
- For each option specified, list the every possible outcome, which should be exhaustive and exclusive. Set the possible consequences.
- For each option, probability of each outcome is determined.
- A value is assigned to all the option outcomes. The assigned value can be positive or negative accordingly.
- The obtained sum will be the expected value for that option.
Cost benefit analysis is simple approach to estimate the risks. It is easy to understand. Organizations can simply the complex business decisions by conducting cost benefit analysis. No matter how dissimilar projects are, the analysis allows the businesses compare them. It is because it gives an objective way for projects’ comparisons. It is also an effective decision – making tool. It is a common business planning tool. Cost benefit analysis is applied in all the areas such as accounting, business development, finance, economics and marketing.
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