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8/7/2019 Cost Benefit Analysis v1
http://slidepdf.com/reader/full/cost-benefit-analysis-v1 1/23
8/7/2019 Cost Benefit Analysis v1
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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
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I ntroduction
� CBA is a process for evaluating the merits of aparticular project in a systematic way in terms of costand benefit¶s of the project.
� Cost is the value of money that has been used up toproduce something, and hence is not available for use anymore.
� Benefit are the monetary values of desirableconsequence of economic polices and decisions
� The conceptual and theoretical framework of CBA is
derived from welfare economics
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Cost Benefit Analysis
� Cost Benefit Analysis (CBA) is an economicevaluation technique that measures all the
positive (beneficial) and negative (costly)consequences of an intervention or program inmonetary terms
� The valuation of all program outcomes inmonetary units allows decision makers to directlycompare the outcomes of different types of interventions
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H istory 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
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P rinciples of Cost Benefit Analysis
� There must be a common unit of measurement
� CBA valuations should representsProducers or Consumers
� Benefits are usually measured by MarketChoices
� Gross benefits of an increase inconsumption is an area under thedemand curve
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Cont«
� Some measurement of benefits require the
valuation of human life
� The analysis of the project involves withversus without comparison
� CBA involves a particular study area
� Double counting of benefits or cost mustbe avoided
� Decision criteria of projects
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K ey CBA I ndicators
� 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 fundsavailable)
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Case Study
Item Quantity Cost
Network ReadyPC¶s supportingsoftware
10 2450 $ each
Server 1 3500 $
Printers 3 1200 $ eachCabling &Installation
1 4600 $
Sales SupportSoftware
1 15000 $
New computer equipment
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Training Cost
Item Quantity Cost
Computer
Introduction
8 $ 400 each
Key board skills 8 $ 400 each
Sales supportskills
12 $ 700 each
Item Quantity Cost
Lost time 40 man days $ 200 PER DAY
Lost sales
throughdisruption
$ 20,000
Lost sales due toin efficiency
$ 20,000
Other cost
Total Cost = $ 114,000
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Benefits
Item Cost
Tripling of mail shot capacity $ 40,000 / year
Ability to sustain telesalescampaigns
$20,000 / year
Improved customer serviceand retention
$30,000 / year
Improved accuracy of customer information
$10,000 / year
Improved efficiency andreliability of follow-up
$50,000 / year
More ability to manage saleseffort $10,000 / year
Total Benefit: $160,000/year
Payback time: $114,000 / $160,000 = 0.63 of a year = approx. 8 months
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P ay Back Time /Break Even P oint
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Challenges of CBA � Accuracy problem
1) Inaccurate cost and benefit estimation
2) Rely heavily on similar projects of past3) Rely heavily on project members
4) Cant avoid the unconscious bias of teammembers
� Determination of which cost to include in the
analysis
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Tool to I mprove 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.
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MEAN MOST FAVOURABLELEAST FAVOURABLE
Predictor¶s curve
Reference curve
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Conclusion
� Performing a Cost-Benefit Analysis iscritical to the continuation of adevelopment product
� Superficial attention to its developmentmay result in erroneous conclusionswhich will lead a company down a pathto disaster
� It is important that both costs andbenefits be thoroughly defined and
scrutinized
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Q & A
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R eference
Web reference
� http://www.sjsu.edu/faculty/watkins/cba.htm
� http://www.solutionmatrix.com/cost-benefit-analysis.html
� http://en.wikipedia.org/wiki/Cost-benefit_analysis� http://www.mindtools.com/pages/article/newTED_08.htm
� http://www.cdc.gov/owcd/eet/CBA/fixed/1.html
� http://www.cdc.gov/owcd/eet/CBA/fixed/2.html#framingacba
� http://www.econweb.com/MacroWelcome/sandd/notes.html
Book Reference
� An introduction to cost benefit analysis by Thayer Watkins & TornadoAlley
� Applied Cost Benefit Analysis by Robert . J . Brent
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