Cost-Benefit Analysis

Definition

Cost-benefit analysis is a systematic process for calculating and comparing the benefits and costs of a decision, project, or policy. It is used to determine whether the benefits outweigh the costs and to quantify the overall value to help make informed choices.

5 Must Know Facts For Your Next Test

1. Cost-benefit analysis is a tool used to evaluate the economic feasibility and justification of a decision or project by systematically identifying and comparing its costs and benefits.
2. It helps decision-makers determine whether the benefits of a course of action outweigh the costs, allowing them to make more informed and rational choices.
3. Cost-benefit analysis considers both tangible and intangible costs and benefits, including direct, indirect, and opportunity costs, as well as quantifiable and non-quantifiable impacts.
4. Discounting future costs and benefits to their present value is a key component of cost-benefit analysis, allowing for the time value of money to be accounted for.
5. Sensitivity analysis is often used in cost-benefit analysis to assess the robustness of the results by examining how changes in key assumptions or variables affect the overall outcome.

Review Questions

• Explain how cost-benefit analysis can be applied in the context of programmed and nonprogrammed decisions (2.3 Programmed and Nonprogrammed Decisions).
  • Cost-benefit analysis can be a valuable tool in both programmed and nonprogrammed decision-making. For programmed decisions, which are routine and repetitive, cost-benefit analysis can help evaluate the economic feasibility of standardized processes and procedures. In the context of nonprogrammed decisions, which are unique and unstructured, cost-benefit analysis can provide a framework for systematically comparing the potential costs and benefits of alternative courses of action, supporting more informed and rational decision-making.
• Describe how cost-benefit analysis can be used to improve the quality of decision-making (2.5 Improving the Quality of Decision-Making).
  • Cost-benefit analysis can enhance the quality of decision-making by providing a structured and objective approach to evaluating the merits of a decision or course of action. By identifying and quantifying the relevant costs and benefits, it allows decision-makers to better understand the trade-offs involved and make more informed choices. Additionally, the process of conducting a cost-benefit analysis can help improve the decision-making process by encouraging the consideration of alternative options, the gathering of relevant data, and the systematic evaluation of the potential consequences of a decision.
• Analyze how cost-benefit analysis can be applied in the context of managing now for future technology and innovation (18.7 Managing Now for Future Technology and Innovation).
  • When managing for future technology and innovation, cost-benefit analysis can be a valuable tool for evaluating the potential long-term impacts of current decisions and investments. By considering the future costs and benefits of adopting new technologies or pursuing innovative strategies, organizations can make more informed choices about how to allocate resources and manage the risks associated with technological change. Cost-benefit analysis can help decision-makers weigh the immediate costs of investing in emerging technologies against the potential future benefits, such as increased efficiency, productivity, or competitive advantage. This analytical approach can support more effective and forward-looking management of technological and innovative initiatives.

Related terms

Opportunity Cost: The cost of an alternative that must be forgone in order to pursue a certain action or decision.

Discounting: The process of determining the present value of future cash flows or benefits by applying an appropriate discount rate.

Sensitivity Analysis:

The examination of how changes in one or more input variables impact the overall outcome of a cost-benefit analysis.