Cost Benefit Analysis Methodology
Cost-benefit analysis (CBA) provides a means for systematically comparing the value of outcomes with the value of resources achieving the outcomes required.
Cost benefit analysis is a method that facilitates decision makers of companies or institutions to evaluate potential outcomes and choose technologies to achieve these outcomes. Decisions that are well intended can lead to losses in results as unexpected outcomes develop, or as outcomes have unexpected consequences. Decision makers therefore have a great need for a framework which structures information in a way, which makes the complexity more tractable, but still takes into account the implications of the complexity. Cost-benefit analysis is an analytical tool, which has the potential to significantly advance this process.
Cost-benefit analysis (CBA) provides a means for systematically comparing the value of outcomes with the value of resources achieving the outcomes required. It measures the economic efficiency of the proposed technology or project. When all else is equal more efficient projects should be chosen over less efficient ones. When there are many options to consider during a decision-making task, it is useful to evaluate the options with a common metric. Cost-benefit analysis refers to any type of structured method for evaluating decision options.
CBA has become widely accepted among business and governmental organisations. Although CBA has definite limitations, especially in the non-standard way that the payoff function is derived and calculated, its potential for making decisions more rational is comforting to those who must make the decisions. In situations in which large amounts of money are at stake, the presentation of a cost-benefit analysis is the preferred way to demonstrate the reasoning behind investments.
For the application of CBA, inputs may be divided into parameter values and benefit and cost values. Parameters include the discount rate, the future rates of economic growth, the future rates of inflation and the estimations about the future rates of technological change. Benefit and costs include monetary values for marketed goods, monetary values for non-marketed directly used goods, monetary values for non-marketed passively used goods, goods for which monetary values cannot be measured.