Cost Benefit Analysis

Cost benefit analysis (CBA) is a systematic approach to estimating the strengths and weaknesses of alternatives (for example in transactions, activities, functional business requirements or projects investments); it is used to determine options that provide the best approach to achieve benefits while preserving savings.The CBA is also defined as a systematic process for calculating and comparing benefits and costs of a decision, policy (with particular regard to government policy) or (in general) project.

Broadly, CBA has two main purposes:

  1. To determine if an investment/decision is sound (justification/feasibility) – verifying whether its benefits outweigh the costs, and by how much;
  2. To provide a basis for comparing projects – which involves comparing the total expected cost of each option against its total expected benefits.

CBA is related to (but distinct from) cost-effectiveness analysis. In CBA, benefits and costs are expressed in monetary terms, and are adjusted for the time value of money, so that all flows of benefits and flows of project costs over time (which tend to occur at different points in time) are expressed on a common basis in terms of their net present value.

Closely related, but slightly different, formal techniques include cost-effectiveness analysis, cost–utility analysis, risk–benefit analysis, economic impact analysis, fiscal impact analysis, and social return on investment (SROI) analysis.