Cost-Benefit Analysis is a financial decision-making tool used to assess the economic pros and cons of a project or decision. It involves calculating and comparing the benefits and costs of a project, decision, or policy. This analysis helps in determining the net economic impact and aids stakeholders in making informed choices by quantifying financial, social, and environmental factors. The primary benefit of using CBA is its ability to provide a clear picture of the economic viability of decisions, promoting more efficient resource allocation.
Define the scope and objectives of the project. | Identify and categorize costs and benefits. | Assign a monetary value to the costs and benefits. | Adjust for any timing differences using discounting techniques. | Calculate net present value (NPV) or other relevant financial metrics. | Conduct sensitivity analysis to understand the impact of uncertainties. | Prepare a report summarizing the findings and recommendations.
Ensure comprehensive identification and quantification of all costs and benefits. | Use conservative estimates to account for uncertainty. | Regularly update analysis to reflect changes in economic conditions or project scope.
Provides a clear economic framework for decision-making. | Helps in identifying the most economically viable options. | Encourages accountability and transparency in financial decisions.
Can be subjective based on the valuation of costs and benefits. | May overlook non-quantifiable factors such as social impact. | Sensitive to changes in input assumptions, which can alter outcomes.
Evaluating new projects or policies. | Making decisions between multiple investment options.
Situations where intangible benefits or costs dominate. | When quick decision-making is required without detailed analysis.