What is Cost-Benefit Analysis?
317 reads · Last updated: December 5, 2024
A cost-benefit analysis is a systematic process that businesses use to analyze which decisions to make and which to forgo. The cost-benefit analyst sums the potential rewards expected from a situation or action and then subtracts the total costs associated with taking that action. Some consultants or analysts also build models to assign a dollar value on intangible items, such as the benefits and costs associated with living in a certain town.
Definition
Cost-benefit analysis is a systematic process used by businesses to analyze decisions, determining which decisions to make and which to forgo. Cost-benefit analysts add up the expected potential returns from a situation or action and then subtract the total costs associated with taking that action. Some consultants or analysts also build models to assign a monetary value to intangible items, such as the benefits and costs associated with living in a particular town.
Origin
The concept of cost-benefit analysis originated in the late 19th and early 20th centuries, initially used for evaluating public works projects. Over time, this method has been widely applied in various fields, including business, government policy, and non-profit organizations, to help decision-makers make optimal choices under limited resources.
Categories and Features
Cost-benefit analysis can be divided into quantitative and qualitative analysis. Quantitative analysis involves converting all costs and benefits into monetary values for direct comparison. Qualitative analysis considers factors that are difficult to quantify, such as social impacts and environmental benefits. Its features include systematic and comprehensive evaluation, helping decision-makers identify and assess all relevant factors.
Case Studies
A typical case is a city government using cost-benefit analysis to decide whether to build a new bridge. By calculating the total costs of construction and maintenance and comparing them with the expected benefits of improved traffic and economic growth, the government can make an informed decision. Another case is a company considering launching a new product, using cost-benefit analysis to evaluate market potential and production costs, thereby deciding whether to invest.
Common Issues
Investors often encounter issues such as accurately estimating the value of intangible assets and dealing with uncertainty and risk when applying cost-benefit analysis. A common misconception is that all factors can be precisely quantified, overlooking the importance of qualitative factors.
