Cost/Benefit Analysis Flashcards
Cost Benefit Analysis (CBA)
A method of measuring the cost and benefit of a potential project. This extends to external costs and benefits to society. As well as the business itself.
This is most often used by the government in the public sector to undergo major infrastructure changes.
Private Costs
These are costs that the business making the investment must accept. Recruitment, Training and Capital Equipment
Private Benefits
These are the benefits the business receives from doing the project. Profit, Brand Awareness and Productivity.
Public Costs
These costs are external to the business undergoing the investment. A new factory will reduce open space, increase climate change etc…
Public Benefits
These benefits are experienced external to the investment. New jobs, Reduced Crime Rate, Increased Accessibility.
Social Costs Formula
Private Cost + Public Cost
Social Benefit Formula
Private Benefit + Public Benefit
Social Cost Benefit
Where social benefits exceed social costs, it is likely worth going ahead with the project
Advantages of Cost Benefit Analysis
-Considers a wide range of benefits and costs
-Impacts on society and community are noted
-Shows businesses care about their impact
Disadvantages of Cost Benefit Analysis
-Some factors are very hard to quantify
-Valuations include value judgements which will be subjective and therefore biased.
-Doesn’t necessarily include all factors + stakeholders
