Using a cost benefit analysis can help teams identify the highest and best return on an investment based on the cost, resources, and risk involved. A cost benefit analysis also known as a benefit cost analysis is a process by which organizations can analyze decisions, systems or projects, or determine a value for intangibles. The model is built by identifying the benefits of an action as well as the associated costs, and subtracting the costs from benefits. Why Use Cost Benefit Analysis? Organizations rely on cost benefit analysis to support decision making because it provides an agnostic, evidence-based view of the issue being evaluated—without the influences of opinion, politics, or bias. By providing an unclouded view of the consequences of a decision, cost benefit analysis is an invaluable tool in developing business strategy, evaluating a new hire, or making resource allocation or purchase decisions.
IS-276.A: Benefit-Cost Analysis Fundamentals
FEMA - Emergency Management Institute (EMI) Course | ISA: Benefit-Cost Analysis Fundamentals
Cost—benefit analysis , in governmental planning and budgeting, the attempt to measure the social benefits of a proposed project in monetary terms and compare them with its costs. The procedure, which is equivalent to the business practice of cost-budgeting analysis, was first proposed in by the French engineer A. It was not seriously applied until the U. Flood Control Act, which required that the benefits of flood-control projects exceed their costs. A cost—benefit ratio is determined by dividing the projected benefits of a program by the projected costs.
The business or analyst sums the benefits of a situation or action and then subtracts the 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. In many models, a cost-benefit analysis will also factor the opportunity cost into the decision-making process.
Once decisions have been made on how the limited national budget should be divided between different groups of activities, or even before this, public authorities need to decide which specific projects should be undertaken. One method that has been used is cost-benefit analysis. This attempts to do for government programs what the forces of the marketplace do for business programs: to measure, and compare in terms of money , the discounted streams of future benefits and future costs associated with a proposed project. If the ratio of benefits to costs is considered satisfactory, the project should be undertaken.