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Introduction To Cost Benefit Analysis

This document provides an introduction to cost-benefit analysis (CBA). It explains that CBA is used to assess the monetary and non-monetary costs and benefits of a particular choice or project. The document outlines the key steps in CBA, which include identifying all of the costs and benefits of a project, assigning monetary values to both costs and benefits even if non-monetary, and comparing the total costs to total benefits to determine if the project should be pursued. CBA is commonly used to evaluate public projects and policies by weighing all of the associated costs and benefits.

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69 views28 pages

Introduction To Cost Benefit Analysis

This document provides an introduction to cost-benefit analysis (CBA). It explains that CBA is used to assess the monetary and non-monetary costs and benefits of a particular choice or project. The document outlines the key steps in CBA, which include identifying all of the costs and benefits of a project, assigning monetary values to both costs and benefits even if non-monetary, and comparing the total costs to total benefits to determine if the project should be pursued. CBA is commonly used to evaluate public projects and policies by weighing all of the associated costs and benefits.

Uploaded by

C. Spencer
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Introduction to

Cost-Benefit
Analysis
SSR 3013: PROJECT EVALUATION AND COST BENEFIT ANALYSIS
1. Introduction
Let’s start with the first set of slides
Cost-benefit analysis (CBA) is the implicit or
explicit assessment of the benefits and costs
(i.e., pros and cons, advantages and
disadvantages) associated with a particular
choice.

Benefits and costs may be monetary or non-


monetary
2. Definition of CBA
Cost-benefit analysis is a set of practical procedures for
guiding public expenditure decisions

 Project evaluation usually requires comparing costs


and benefits from different time periods

 Dollars across time periods are not immediately


comparable, because of inflation and returns in the
market
 CBA seeks to correct project appraisal for market
failure

 Environmental impacts of projects/policies are


frequently externalities, both negative and positive

 CBA seeks to attach monetary values to external


effects so that they can be taken account of along
with the effects on ordinary inputs and outputs to the
project/policy
Private
Decisions

Taking Martial Art Going to movie on


Classes on Saturday Night
Saturday Night

INTERNAL PROCESS OF CONSIDERATION

An individual will choose an action if:

Benefits (B) > Costs (C)


Public
Decisions

CBA is most commonly used for public decisions:

 Policy proposals
 Programs
 Projects (dams, bridges, traffic circles, riverfront
parks, libraries, drunk driving laws, and anything
else the government might fund)

i. CBA can be used to rank alternative projects as


well as evaluating the social value of one
particular project.
continue…

Costs and benefits may occur over different periods


of time:

Example: costs for a dam built today may be spent


primarily during the initial period of the project, but
benefits will accrue over the lifetime of the dam.
3. How to Identify the Cost
i. Make a list of all monetary costs that will be incurred
upon implementation and throughout the life of the
project. (Start-up fees, licenses, production materials, payroll expenses,
user acceptance processes, training, and travel expenses)

ii. Make a list of all non-monetary costs that are likely to be


absorbed. (time, lost production on other tasks, imperfect processes,
potential risks, market saturation or uncertainties, and influences on one’s
reputation)
iii. Assign monetary values to the costs identified in steps one
and two. To ensure equality across time, monetary values are stated in present
value terms. If realistic cost values cannot be readily evaluated,
consult with market trends and industry surveys for
comparable implementation costs in similar businesses.

iv. Add all anticipated costs together to get a total costs value.
4. How to Identify the Benefit
i. Make a list of all monetary benefits that will be
experienced upon implementation and thereafter. (direct
profits from products and/or services, increased contributions from investors,
decreased production costs due to improved and standardized processes, and
increased production capabilities, among others)

ii. Make a list of all non-monetary benefits that one is likely


to experience. (decreased production times, increased reliability and
durability, greater customer base, greater market saturation, greater customer
satisfaction, and improved company or project reputation)
iii. Assign monetary values to the benefits identified
in steps one and two. Be sure to state these monetary values in present
value terms as well.

iv. Add all anticipated benefits together to get a total benefits


value.
5. How to Evaluate Cost and
Benefit
Compare the total costs and total benefits values:

 If the total costs > the total benefits, one can conclude
that the project is not a worthwhile investment of
company time and resources.

 If total costs = total benefits, it is best to reevaluate the


costs and benefits identified and revise the cost
benefit analysis. Often times, items are missed or incorrectly
quantified, which are common errors in a cost benefit analysis.

 If the total costs < the total benefits, the project is a


worthwhile investment of company time and resources.
6. Steps In CBA
Step One: Brainstorm Costs and Benefits

 First, take time to brainstorm all of the costs associated with


the project, and make a list of these.
 Then, do the same for all of the benefits of the project.
 Can you think of any unexpected costs?
 And are there benefits that you may not initially have
anticipated?

When you come up with the costs and benefits, think about the lifetime of the
project. What are the costs and benefits likely to be over time?
Step Two: Assign a Monetary Value to the Costs

$ Costs include the costs of physical resources needed, as well


as the cost of the human effort involved in all phases of a
project. Costs are often relatively easy to estimate (compared
with revenues).

$ It's important that you think about as many related costs as


you can. For example, what will any training cost? Will there
be a decrease in productivity while people are learning a new
system or technology, and how much will this cost?
$ Remember to think about costs that will continue to be
incurred once the project is finished. For example, consider
whether you will need additional staff, if your team will need
ongoing training, or if you'll have increased overheads.
Step Three: Assign a Monetary Value to the Benefits

∞ Firstly, it's often very difficult to predict revenues


accurately, especially for new products. Secondly, along
with the financial benefits that you anticipate, there are
often intangible, or soft, benefits that are important
outcomes of the project.

∞ For instance, what is the impact on the environment,


employee satisfaction, or health and safety? What is the
monetary value of that impact?
As an example:

∞ Is preserving an ancient monument worth $500,000, OR is


it worth $5,000,000 because of its historical importance?
∞ What is the value of stress-free travel to work in the
morning?

Here, it's important to consult with other stakeholders and


decide how you'll value these intangible items
Step Four: Compare Costs and Benefits

֎ Finally, compare the value of your costs to the value of your


benefits, and use this analysis to decide your course of
action.

֎ To do this, calculate your total costs and your total benefits,


and compare the two values to determine whether your
benefits outweigh your costs.

(At this stage it's important to consider the payback time, to


find out how long it will take for you to reach the break even
point – the point in time at which the benefits have just
repaid the costs.)
֎ For simple examples, where the same benefits are received
each period, you can calculate the payback period by
dividing the projected total cost of the project by the
projected total revenues:

Total cost / total revenue (or benefits) = length of time (payback


period)
Pantai Dalam
Sewage Treatment Plant
thanks!
Any questions?

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