Benefit–cost analysis

Cost benefit analysis (CBA), sometimes called benefit cost analysis (BCA), is a systematic approach to estimating the strengths and weaknesses of alternatives (for example in transactions, activities, functional business requirements or projects investments); it is used to determine options that provide the best approach to achieve benefits while preserving savings. The CBA is also defined as a systematic process for calculating and comparing benefits and costs of a decision, policy (with particular regard to government policy) or (in general) project.

Broadly, CBA has two main purposes:

CBA is related to (but distinct from) cost-effectiveness analysis. In CBA, benefits and costs are expressed in monetary terms, and are adjusted for the time value of money, so that all flows of benefits and flows of project costs over time (which tend to occur at different points in time) are expressed on a common basis in terms of their net present value.

Closely related, but slightly different, formal techniques include cost-effectiveness analysis, cost–utility analysis, risk–benefit analysis, economic impact analysis, fiscal impact analysis, and social return on investment (SROI) analysis.

Cost–benefit analysis is often used by organizations to appraise the desirability of a given policy. It is an analysis of the expected balance of benefits and costs, including an account of foregone alternatives and the status quo. CBA helps predict whether the benefits of a policy outweigh its costs, and by how much relative to other alternatives, so that one can rank alternate policies in terms of the cost–benefit ratio. Generally, accurate cost–benefit analysis identifies choices that increase welfare from a utilitarian perspective. Assuming an accurate CBA, changing the status quo by implementing the alternative with the lowest cost–benefit ratio can improve Pareto efficiency. While CBA can offer a well-educated estimate of the best alternative – perfect appraisal of all present and future costs and benefits is difficult –, perfection in terms of economic efficiency and social welfare are not guaranteed.

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