Cost Benefit Analysis - Revision history

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User: Cost-benefit analysis is the exercise of evaluating a planned action by determining what net value it will have for the company. Basically, a cost-benefit analysis finds, quantifies, and adds all the positive factors. These are the benefits.

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Cost-benefit analysis is the exercise of evaluating a planned action by determining what net value it will have for the company. Basically, a cost-benefit analysis finds, quantifies, and adds all the positive factors. These are the benefits. Then it identifies, quantifies, and subtracts all the negatives, the costs. The difference between the two indicates whether the planned action is advisable. The real key to doing a successful cost-benefit analysis is making sure to include all the costs and all the benefits and properly quantify them. It is the fundamental assessment behind virtually every business decision, due to the simple fact that business managers do not want to spend money unless the benefits that derive from the expenditure are expected to exceed the costs. As companies increasingly seek to cut costs and improve productivity, cost-benefit analysis has become a valuable tool for evaluating a wide range of business opportunities, such as major purchases, organizational changes, and expansions.<ref>What is Cost Benefit Analysis? [http://www.inc.com/encyclopedia/cost-benefit-analysis.html Inc.com/Encyclopedia]</ref>

[[File:Cost benefit analysis 250.png|300px|Cost Benefit Analysis]]<br />
source: [http://www.odhq.net/cost-benefit-analyses-cba ODHQ.ne]

'''Cost Benefit Analysis Definition and Concept'''<br />
The concept of CBA dates back to an 1848 article by Jules Dupuit and was formalized in subsequent works by Alfred Marshall. The Corps of Engineers initiated the use of CBA in the US, after the Federal Navigation Act of 1936 effectively required cost–benefit analysis for proposed federal waterway infrastructure. The Flood Control Act of 1939 was instrumental in establishing CBA as federal policy. It demanded that "the benefits to whomever they accrue in excess of the estimated costs."<ref>History of Cost Benefit Analysis [https://en.wikipedia.org/wiki/Cost-benefit_analysis Wikipedia]</ref>

'''Cost Benefit Analysis Template'''
Using the cost-benefit analysis template in this document will provide cost and benefit information that can be used to analyze and evaluate alternative approaches to projects or decisions. Since this CBA is tailored for IT, it is oriented around projects or decisions relating to new systems or processes (although it can be adapted for other purposes).<ref>Cost Benefit Analysis Template [http://www.upenn.edu/computing/isc/pmap/Definition/Cost-benefit%20template%20condensed%20version.pdf upenn.edu]</ref>

[http://www.upenn.edu/computing/isc/pmap/Definition/Cost-benefit%20template%20condensed%20version.pdf|Cost Benefit Analysis Template]

'''Cost Benefit Analysis Example'''<ref>Cost Benefit Analysis - Example [http://management.about.com/cs/money/a/CostBenefit_2.htm about.com]</ref><br />
For accurate Cost Benefit Analysis one has to collect ALL the positive and negative factors and have them quantified. One can total up all the positive factors (benefits), total up all the negative factors (costs), and find the difference between the two. One can also group the factors together. A cost benefit analysis might look something like this:

Cost Benefit Analysis - Purchase of New Stamping Machine
(Costs shown are per month and amortized over four years)

Purchase of Machine .................... -$20,000 includes interest and taxes
Installation of Machine ..................... -3,125 including screens & removal of existing stampers
Increased Revenue .......................... 27,520 net value of additional 100 units per hour, 1 shift/day, 5 days/week
Quality Increase Revenue ..................... 358 calculated at 75% of current reject rate

Reduced material costs ...................... 1,128 purchase of bulk supply reduces cost by $0.82 per hundred
Reduced Labor Costs ....................... 18,585 3 operators salary plus labor o/h
New Operator ................................. -8,321 salary plus overhead. Includes training
Utilities ............................................ -250 power consumption increase for new machine
Insurance ......................................... -180 premiums increase
Square footage ...................................... 0 no additional floor space is required
Net Savings per Month ........................... $15,715

This cost benefit analysis clearly shows the purchase of the stamping machine is justified. The machine will save the company over $15,000 per month, almost $190,000 a year.

This is just one example of how one can use cost benefit analysis, determine the advisability of a course of action and then to support it once the action is proposed.

'''Cost Benefit Analysis Spreadsheet'''

This comprehensive Cost Benefit Analysis Spreadsheet is an excellent tool to assist IT managers in their analysis prior to implementing any IT project. The tool will help demonstrate that the most cost-effective alternatives were chosen based on tangible and intangible, quantitative and qualitative criteria.

[https://www.tec.govt.nz/Documents/Forms%20Templates%20and%20Guides/Cost-Benefit-Analysis-Tool.xls Cost Benefit Analysis Spreadsheet]

'''Advantages and Disadvantages of Cost Benefit Analysis'''<ref>Advantages and Disadvantages of Cost Benefit Analysis [http://smallbusiness.chron.com/advantages-disadvantages-cost-benefit-analysis-10676.html Chron]</ref><br />
Cost benefit analysis, also referred to as “benefit cost analysis,” is a method of evaluation that estimates the value of projects to determine whether those projects are worth undertaking or continuing. At its most basic, cost benefit analysis, CBA, could be a calculation that continuing production of a product or product option is no longer viable. At its most complex, CBA can be used to take into account the benefits the company receives as well as the benefits that accrue to the community at large.

*Simplicity
The main advantage of cost benefit analysis is that it is easy to understand. You are simply looking at whether benefits outweigh costs. When you do this quantitatively, measuring the dollar amount of the benefits and the costs involved in a project, the cost benefit is very easy to see. This clarity means that everyone involved will understand the monetary nature of the project and the question of its continuance. Its simplicity also means that doing a CBA is easily possible for various scenarios, locations and more.

*Estimation
The simplicity of cost benefit analysis can paradoxically lead to complications. For instance, if you are performing a cost benefit analysis to determine whether or not to take on a project, you have to be able to perform accurate estimations about the benefits you would receive from the project. If your calculations are inaccurate, you could deem a project viable, only to later discover it ended up costing the company money. Likewise, you may decide to halt such a project, only to later find that consumer attitudes have changed and you missed out on being a trailblazer in that product type. The best estimations may not line up with actual consumer behavior.

*Unit of Measurement
Moreover, to gain this simplicity, you have to use a common measurement — one of the disadvantages of CBA. Determining the quantitative benefits of a project is relatively straightforward; you basically add up the costs and the profits and compare the two. However, when you factor in qualitative benefits, the picture can become more complicated. For example, if you are considering implementing an employee bonus program, you will obviously incur costs. In exchange, you may receive benefits like increased employee satisfaction, decreased turnover and greater productivity. The benefits are significant but difficult to compare — apples to apples — to the costs involved.

*Accuracy
Further, accuracy with regard to benefits and costs must be closely monitored because benefits are easy to double count. For example, if you are using CBA to decide whether to build a highway, you may be tempted to tally the increase in property values along with reduced travel time. However, property values would include, to a large extent, the value of location with regard to travel time; thus, if you count both, you would overestimate the project’s benefits.

===References===
<references />

===External References===

*An Introduction to Cost Benefit Analysis [http://www.sjsu.edu/faculty/watkins/cba.htm sjsu.edu]
*Performing Cost Benefit Analysis [http://www.dummies.com/how-to/content/performing-a-costbenefit-analysis.html dummies]
*Cost Benefit Analysis of Interventions [http://www.who.int/indoorair/interventions/cost_benefit/en/ who]
*Benefit-Cost Analysis - The Concise Encyclopedia of Economics [http://www.econlib.org/library/Enc/BenefitCostAnalysis.html econ library]

@@ Line 67: / Line 67: @@
 == External References ==
-*[http://www.sjsu.edu/faculty/watkins/cba.htm An Introduction to Cost Benefit Analysis
+*[http://www.sjsu.edu/faculty/watkins/cba.htm An Introduction to Cost Benefit Analysis]
 *[http://www.dummies.com/how-to/content/performing-a-costbenefit-analysis.html Performing Cost Benefit Analysis]
 *[http://www.who.int/indoorair/interventions/cost_benefit/en/ Cost Benefit Analysis of Interventions]

@@ Line 70: / Line 70: @@
 *[http://www.dummies.com/how-to/content/performing-a-costbenefit-analysis.html Performing Cost Benefit Analysis]
 *[http://www.who.int/indoorair/interventions/cost_benefit/en/ Cost Benefit Analysis of Interventions]
-*[http://www.econlib.org/library/Enc/BenefitCostAnalysis.html econ Benefit-Cost Analysis - The Concise Encyclopedia of Economics]
+*[http://www.econlib.org/library/Enc/BenefitCostAnalysis.html Benefit-Cost Analysis - The Concise Encyclopedia of Economics]
 __NOTOC__

@@ Line 1: / Line 1: @@
-Cost-benefit analysis is the exercise of evaluating a planned action by determining what net value it will have for the company. Basically, a cost-benefit analysis finds, quantifies, and adds all the positive factors. These are the benefits. Then it identifies, quantifies, and subtracts all the negatives, the costs. The difference between the two indicates whether the planned action is advisable. The real key to doing a successful cost-benefit analysis is making sure to include all the costs and all the benefits and properly quantify them. It is the fundamental assessment behind virtually every business decision, due to the simple fact that business managers do not want to spend money unless the benefits that derive from the expenditure are expected to exceed the costs. As companies increasingly seek to cut costs and improve productivity, cost-benefit analysis has become a valuable tool for evaluating a wide range of business opportunities, such as major purchases, organizational changes, and expansions.<ref>What is Cost Benefit Analysis? [http://www.inc.com/encyclopedia/cost-benefit-analysis.html Inc.com/Encyclopedia]</ref>
+Cost-benefit analysis is the exercise of evaluating a planned action by determining what net [[value]] it will have for the company. Basically, a cost-benefit analysis finds, quantifies, and adds all the positive factors. These are the benefits. Then it identifies, quantifies, and subtracts all the negatives, the costs. The difference between the two indicates whether the planned action is advisable. The real key to doing a successful cost-benefit analysis is making sure to include all the costs and all the benefits and properly quantify them. It is the fundamental assessment behind virtually every [[business]] decision, due to the simple fact that business managers do not want to spend money unless the benefits that derive from the expenditure are expected to exceed the costs. As companies increasingly seek to cut costs and improve [[productivity]], cost-benefit analysis has become a valuable tool for evaluating a wide range of business opportunities, such as major purchases, organizational changes, and expansions.<ref>What is Cost Benefit Analysis? [http://www.inc.com/encyclopedia/cost-benefit-analysis.html Inc.com/Encyclopedia]</ref>
@@ Line 8: / Line 8: @@
 '''Cost Benefit Analysis Definition and Concept'''<br />
-The concept of CBA dates back to an 1848 article by Jules Dupuit and was formalized in subsequent works by Alfred Marshall. The Corps of Engineers initiated the use of CBA in the US, after the Federal Navigation Act of 1936 effectively required cost–benefit analysis for proposed federal waterway infrastructure. The Flood Control Act of 1939 was instrumental in establishing CBA as federal policy. It demanded that "the benefits to whomever they accrue in excess of the estimated costs."<ref>History of Cost Benefit Analysis [https://en.wikipedia.org/wiki/Cost-benefit_analysis Wikipedia]</ref>
+The concept of CBA dates back to an 1848 article by Jules Dupuit and was formalized in subsequent works by Alfred Marshall. The Corps of Engineers initiated the use of CBA in the US, after the Federal Navigation Act of 1936 effectively required cost–benefit analysis for proposed federal waterway infrastructure. The Flood [[Control]] Act of 1939 was instrumental in establishing CBA as federal [[policy]]. It demanded that "the benefits to whomever they accrue in excess of the estimated costs."<ref>History of Cost Benefit Analysis [https://en.wikipedia.org/wiki/Cost-benefit_analysis Wikipedia]</ref>
-'''Cost Benefit Analysis Template'''
+'''Cost Benefit Analysis [[Template]]'''
 Using the cost-benefit analysis template in this document will provide cost and benefit information that can be used to analyze and evaluate alternative approaches to projects or decisions. Since this CBA is tailored for IT, it is oriented around projects or decisions relating to new systems or processes (although it can be adapted for other purposes).<ref>Cost Benefit Analysis Template [http://www.upenn.edu/computing/isc/pmap/Definition/Cost-benefit%20template%20condensed%20version.pdf upenn.edu]</ref>
@@ Line 26: / Line 26: @@
 Installation of Machine ..................... -3,125 including screens & removal of existing stampers
 Increased Revenue .......................... 27,520 net value of additional 100 units per hour, 1 shift/day, 5 days/week
-Quality Increase Revenue ..................... 358 calculated at 75% of current reject rate
+[[Quality]] Increase Revenue ..................... 358 calculated at 75% of current reject rate
-Reduced material costs ...................... 1,128 purchase of bulk supply reduces cost by $0.82 per hundred
+Reduced material costs ...................... 1,128 purchase of bulk [[supply]] reduces cost by $0.82 per hundred
 Reduced Labor Costs ....................... 18,585 3 operators salary plus labor o/h
 New Operator ................................. -8,321 salary plus overhead. Includes training
-Utilities ............................................ -250 power consumption increase for new machine
+Utilities ............................................ -250 [[power]] consumption increase for new machine
 Insurance ......................................... -180 premiums increase
 Square footage ...................................... 0 no additional floor space is required
@@ Line 49: / Line 49: @@
 '''Advantages and Disadvantages of Cost Benefit Analysis'''<ref>Advantages and Disadvantages of Cost Benefit Analysis [http://smallbusiness.chron.com/advantages-disadvantages-cost-benefit-analysis-10676.html Chron]</ref><br />
-Cost benefit analysis, also referred to as “benefit cost analysis,” is a method of evaluation that estimates the value of projects to determine whether those projects are worth undertaking or continuing. At its most basic, cost benefit analysis, CBA, could be a calculation that continuing production of a product or product option is no longer viable. At its most complex, CBA can be used to take into account the benefits the company receives as well as the benefits that accrue to the community at large.
+Cost benefit analysis, also referred to as “benefit cost analysis,” is a method of [[evaluation]] that estimates the value of projects to determine whether those projects are worth undertaking or continuing. At its most basic, cost benefit analysis, CBA, could be a calculation that continuing production of a [[product]] or product option is no longer viable. At its most complex, CBA can be used to take into account the benefits the company receives as well as the benefits that accrue to the community at large.
 *Simplicity
@@ Line 57: / Line 57: @@
 The simplicity of cost benefit analysis can paradoxically lead to complications. For instance, if you are performing a cost benefit analysis to determine whether or not to take on a project, you have to be able to perform accurate estimations about the benefits you would receive from the project. If your calculations are inaccurate, you could deem a project viable, only to later discover it ended up costing the company money. Likewise, you may decide to halt such a project, only to later find that consumer attitudes have changed and you missed out on being a trailblazer in that product type. The best estimations may not line up with actual consumer behavior.
-*Unit of Measurement
+*Unit of [[Measurement]]
-Moreover, to gain this simplicity, you have to use a common measurement — one of the disadvantages of CBA. Determining the quantitative benefits of a project is relatively straightforward; you basically add up the costs and the profits and compare the two. However, when you factor in qualitative benefits, the picture can become more complicated. For example, if you are considering implementing an employee bonus program, you will obviously incur costs. In exchange, you may receive benefits like increased employee satisfaction, decreased turnover and greater productivity. The benefits are significant but difficult to compare — apples to apples — to the costs involved.
+Moreover, to gain this simplicity, you have to use a common measurement — one of the disadvantages of CBA. Determining the quantitative benefits of a project is relatively straightforward; you basically add up the costs and the profits and compare the two. However, when you factor in qualitative benefits, the picture can become more complicated. For example, if you are considering implementing an [[employee]] bonus program, you will obviously incur costs. In exchange, you may receive benefits like increased employee satisfaction, decreased turnover and greater productivity. The benefits are significant but difficult to compare — apples to apples — to the costs involved.
 *Accuracy
@@ Line 73: / Line 73: @@
 *Performing Cost Benefit Analysis [http://www.dummies.com/how-to/content/performing-a-costbenefit-analysis.html dummies]
 *Cost Benefit Analysis of Interventions [http://www.who.int/indoorair/interventions/cost_benefit/en/ who]
-*Benefit-Cost Analysis - The Concise Encyclopedia of Economics [http://www.econlib.org/library/Enc/BenefitCostAnalysis.html econ library]
+*Benefit-[[Cost Analysis]] - The Concise Encyclopedia of Economics [http://www.econlib.org/library/Enc/BenefitCostAnalysis.html econ library]