Cost-Benefit Analysis Explained with Simple Steps!

Cost-benefit analysis. Cost-benefit analysis is a mathematical approach to compare the costs and expected benefits of two OR more projects OR options. Cost-benefit analysis is applicable to many industries such as construction, software development, construction, education, healthcare, and information technology. Basically, cost-benefit analysis serves two purposes. To verify that an investment's OR a project's benefits are more than its costs. To select an investment OR a project by comparing the benefits over cost radios. How to perform cost-benefit analysis. You need to follow four basic steps. Conduct a brainstorming session. Assign a monetary value to all the costs. Assign a monetary value to all the benefits. Compare costs and benefits and calculate payback period. For example, XYZ company plans to renew the existing production line. A cost-benefit analysis will be performed to calculate renewing cost against the benefits of adding productivity to the plant. Renewing cost is 300,000 United States dollars. Benefit is the increased production that will provide you an additional 50,000 United States dollars per year. The payback period is 300,000 United States dollars per 50,000 United States dollars equals six years. While performing cost-benefit analysis CBA, don't forget to weigh the total benefits and total costs of a future project at their present value. For a complete cost-benefit analysis, estimate both tangible and intangible costs and benefits.