Cost-Benefit Analysis (CBA)
Cost-Benefit Analysis (CBA) is a systematic approach to evaluating decisions by comparing the total expected costs against the total expected benefits, typically expressed in monetary terms. It helps in choosing the most economically sound option by quantifying both tangible and intangible factors.
Use CBA when you need to compare different project options or evaluate the overall impact of a program in quantifiable terms, especially when resource allocation decisions need to be justified with economic data.
Solves: Difficulty in making strategic choices due to a lack of clear, quantifiable data; subjective decision-making processes.
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Step 1: Define the scope of the analysis and identify all relevant costs and benefits. (15 min)
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Step 2: Quantify costs and benefits, assigning monetary values where possible. (60 min)
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Step 3: Discount future costs and benefits to their present value using an appropriate discount rate. (30 min)
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Step 4: Calculate the Net Present Value (NPV) for each option by subtracting total discounted costs from total discounted benefits. (30 min)
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Step 5: Conduct sensitivity analysis to test the robustness of the results to changes in key assumptions. (30 min)
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Step 6: Interpret the results and make recommendations based on the CBA findings. (15 min)
- Ensure all stakeholders agree on the scope and assumptions of the analysis.
- Engage a professional evaluator experienced in CBA techniques for complex analyses.
- Social Cost-Benefit Analysis (SCBA) which incorporates social and environmental impacts.
- Simplified CBA for smaller projects with fewer variables.