cost benefit analysis Flashcards
examples of financial business decisions :
- product development
- market development
- diversification
- targeting new markets
- opening new locations and building new plants
- changing suppliers
- restructuring
- mergers and acquisitions
- rationalisation
what is cost benefit analysis (cba) ?
a method for measuring, in financial terms, the costs and benefits of an investment project
what does cost benefit analysis involve ?
measurable financial metrics such as revenue earned or costs saved as a result o pursue a project
what considerations does cost benefit analysis include ?
external costs and benefits to society as well as the costs and benefits to just the business
what does cost benefit analysis take into account ?
economic, social, environment
what are private costs ?
costs to the individual consumer or firm of their economic activity
what are public costs ?
costs to third parties of individual consumers or firms economic activity
what are public costs often called ?
external costs
social costs formula :
private costs + public costs = social costs
what are social costs ?
the total costs to society (everyone) from business activity
what are social costs called ?
negative externalities
what are private benefits ?
these are benefits that the business gains as a result of their activities
what may private benefits include ?
increased productivity, higher sales, stronger brand value, increased profits
what are public benefits ?
these are the external benefits to the society that result from the activities of a business
what may public benefits include ?
job creation, higher tax revenues to government, reduction in social problems e.g. crime
what are public benefits called ?
external benefits
social benefits formula :
private benefits + public benefits = social benefits
cost benefit analysis formula :
social benefit (private benefit + public benefit) - social cost (private costs + public costs)
cba decisions : final decision
for a decision to be viable, the benefits must be greater than the costs
cba decisions : steps
- calculate private costs and benefits
- calculate public costs and benefits
- calculate social costs and benefits
- consider qualitative issues
- decide if the project should proceed
benefits of cost benefit analysis :
- it tries to place a value upon the impact of a decision upon society and the community
- it can be used to rank projects according to cost
- it considers the negative and positive externalities for a decision
problems of cost benefit analysis :
- it is impossible to accurately value intangibles like a smell or the view of a countryside
- valuations are subject to bias and value judgements
- it might not consider the impact on all stakeholders
- wrong choices will be made if the valuations are inaccurate
why do businesses struggle to keep up with latest technology ?
difficult and expensive to keep up to date as it changes so quickly
costs of information technology :
- unemployment as fewer employees needed
- new technology brings the need for more training
- costs of updating and maintaining software and hardware
benefits of information technology :
- rise of jobs in newly created sectors e.g. internet banking
- customers desire the latest technology which increases demand
- new skills and training can increase staff motivation
what is the biggest risk for a business ?
rejecting change
what do electronic point of sale (epos) systems help with ?
help to measure and monitor sales data
what is epos data linked into ?
weather patterns, seasonality and times of day to help firms decide upon their staffing needs for that week, delivery schedules and stock orders
