2. Contents
• 1. Introduction
• 2. Cost benefit analysis
• 2.1 History of Cost Benefit Analysis
• 2.2 Principles of CBA
• 2.3 Key CBA Indicators
• 2.4 Challenges of CBA
• 2.5 Tool to improve CBA
• 3. Case study
• 4. Conclusion
• 5. Reference
3. Introduction
• CBA is a process for evaluating the merits of a
particular project in a systematic way in terms of cost
and benefit’s of the project.
• Cost is the value of money that has been used up to
produce something, and hence is not available for
use anymore.
• Benefit are the monetary values of desirable
consequence of economic polices and decisions
• The conceptual and theoretical framework of CBA is
derived from welfare economics
4. Cost Benefit Analysis
• Cost Benefit Analysis (CBA) is an economic
evaluation technique that measures all the
positive (beneficial) and negative (costly)
consequences of an intervention or program in
monetary terms
• The valuation of all program outcomes in
monetary units allows decision makers to directly
compare the outcomes of different types of
interventions
5. History of CBA
• Dates back to the work of Alfred Marshal
1)One of the founder of neoclassical economics
2) Brings the idea of demand and supply; Marginal
utility and cost of production
• Practical application was initiated in U.S by
Corps of Engineers after Federal Navigation act
1936 – Flood control
• Later applied in several fields – High way & Motor
way
6. Principles of Cost Benefit Analysis
• There must be a common unit of
measurement
• CBA valuations should represents
Producers or Consumers
• Benefits are usually measured by Market
Choices
• Gross benefits of an increase in
consumption is an area under the
demand curve
7. Cont…
• Some measurement of benefits require the
valuation of human life
• The analysis of the project involves with
versus without comparison
• CBA involves a particular study area
• Double counting of benefits or cost must
be avoided
• Decision criteria of projects
8. Key CBA Indicators
• NPV (net present value)
• PVB (present value of benefits)
• PVC (present value of costs)
• BCR (benefit cost ratio = PVB / PVC)
• Net benefit = (PVB - PVC)
• NPV/k (where k is the level of funds
available)
9. Case Study
New computer equipment
Item Quantity Cost
Network Ready 10 2450 $ each
PC’s supporting
software
Server 1 3500 $
Printers 3 1200 $ each
Cabling & 1 4600 $
Installation
Sales Support 1 15000 $
Software
10. Training Cost
Item Quantity Cost
Computer 8 $ 400 each
Introduction
Key board skills 8 $ 400 each
Sales support 12 $ 700 each
skills
Other cost
Item Quantity Cost
Lost time 40 man days $ 200 PER DAY
Lost sales $ 20,000
through
disruption
Lost sales due to $ 20,000
in efficiency
Total Cost = $ 114,000
11. Benefits
Item Cost
Tripling of mail shot capacity $ 40,000 / year
Ability to sustain telesales $20,000 / year
campaigns
Improved customer service $30,000 / year
and retention
Improved accuracy of $10,000 / year
customer information
Improved efficiency and $50,000 / year
reliability of follow-up
More ability to manage sales $10,000 / year
effort
Total Benefit: $160,000/year
Payback time: $114,000 / $160,000 = 0.63 of a year = approx. 8 months
17. Challenges of CBA
• Accuracy problem
1) Inaccurate cost and benefit estimation
2) Rely heavily on similar projects of past
3) Rely heavily on project members
4) Cant avoid the unconscious bias of team
members
• Determination of which cost to include in the
analysis
18. Tool to Improve the Accuracy of
CBA
• Reference class forecasting
Three steps:
• Identify a reference class of past, similar projects
• Establish a probability distribution for the selected
reference class for the parameter that is being
forecast.
• Compare the specific project with the reference
class distribution, in order to establish the most
likely outcome for the specific project.
20. Conclusion
• Performing a Cost-Benefit Analysis is
critical to the continuation of a
development product
• Superficial attention to its development
may result in erroneous conclusions
which will lead a company down a path
to disaster
• It is important that both costs and
benefits be thoroughly defined and
scrutinized
