Cost Benefit Analysis (CBA)
Cost benefit analysis (CBA) refers to a systematic process that is used to calculate and compare costs and benefits of projects, decisions and government policies. Cost benefit analysis is also sometimes known as benefit cost analysis (BCA).
There is relation between cost benefit analysis and cost effectiveness analysis, but both of them are not same. In cost benefit analysis, monetary terms are used for expressing benefits and costs and they are adjusted for time value of money. This is done to have all the flows of costs of project over time and flows of benefits expressed in terms of net present value (NPV). Some of the other techniques that are closely related to CBA with slight difference are cost effectiveness analysis, economic impact analysis, cost utility analysis, social return on investment analysis and fiscal impact analysis.
CBA is used for measuring a project’s positive and negative outcomes and this includes effects on both users and non users, externality effect and value of option.
Purpose of cost benefit analysis
There are two purposes of CBA and they are:
1. Determining feasibility of an investment or decision to find if the investment or decision is sound.
2. Providing a common basis for making comparison of projects. In this, the total expected benefits of each option is compared with the expected costs, to ascertain if the benefits are more than the costs and if so then by how much.
Steps of CBA
1. Making a list of alternative projects.
2. Making a list of stakeholders.
3. Measurement selection and measuring all elements of benefit and cost.
4. Prediction of cost and benefit outcome over a period of time.
5. Conversion of cost and benefit into a common basis.
6. Applying discount rate.
7. Calculating each project option’s NPV
8. Performing sensitivity analysis.
9. Adoption of best choice.
Application of CBA
CBA is used by all types of organization – government as well as private, for evaluating the attractiveness of a particular project or policy. It helps in predicting whether the benefit of a project is more than its cost and by how much. If the CBA is accurate then it helps in choosing the alternative that increases welfare from a utilitarian point of view.