COST BENEFIT ANALYSIS Flashcards
When do we choose to do a cost-benefit analysis?
if the subject of animal health decision deals with more long term disease control programs at regional or national level
What do we use the cost-benefit analysis for?
for determining the profitabilty of programs over an extended period of time
What are the main elements of a cost benefit analysis?
enumeration of benefit and costs
determination of the appropriate discount rate
specification of a decision criterion
Present Value Calculation
PV = FV / (1+ r/100)^n
e.g. what is the PV of 100 USD to be received in one year if annual interest rate is 5%
PV= 100 USD (FV) / (1+5/100)^1 = 95 USD
What is the NPV?
= Total PV of benefits - Total PV of cost
the difference etween the total present value of benefits and costs
it represents the value of the program at today prices and indicates the scale of the net benefits but does not show the relative size of the benefits and costs
expensive programs will tend to have a high NPV, even if the benefits are only few percentage more than the costs
What is the B/C reatio?
= total PV of benefits / total PV of costs
B/C ratiio represents the relative size of the costs and benefits but it doesnt give indication of the scale of investment
it should be considered if alternative projects are compared
What is the internal rate of return?
it reflects the interest rate which if applied to the cost and benefits would make the total present value of benefits equal to that of the costs
it is useful beaues it is easily comparable with interest rates in alternative applications and because it avoids the necessity of selecting discount rate
the main disadvantage is that there is no simple formula
IRR can be calculated by iteration at about 3.7%
What is cost effectiveness?
it is ued when the expected benefits are excessively difficult to quantify
the aim is producing the desired result at minimum discounted cost
for example, an extension program may be evaluated by looking at how many people adopted new technology
preference is given to a program that given its costs will benefit a larger number of the target population
