Cost benefit analysis


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Cost benefit analysis

  1. 1. Goal-based evaluation Process-based evaluation Outcomes-based evaluation
  2. 2. All programs aim to produce benefits that outweigh their costs. Costs and benefits can be compared to determine the worthiness of a program. Cost-benefit and cost-effectiveness analysis are the most common methods used to accomplish the comparison between costs and benefits. Both analyses provide information about the net present value (NPV) of a program. NPV is an indicator of how much value an investment or project adds to the firm. The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. In CBA the benefits are transformed into monetary terms and compared to program costs. In CEA benefits are transformed into non-monetary unit, such as lives saved, people attended, and are compared with program costs in dollars.
  3. 3. At the planning stage, CBA or CEA may be undertaken before the fact, based on estimates of anticipated cost and benefits. They are tools analysis, particularly as ways to examine the net benefits of a proposed project or program involving large capital investments. After a program has been in operation for some time, CBA and CEA may be used after the fact, to assess whether the actual costs of the program were justified by the actual benefits
  4. 4. Tangible Direct Intangible Indirect Benefit Cost Monetary
  5. 5. : The CBA could be done from three perspectives or points of view  Social perpective  Government Perpective  Individual Perpective
  6. 6. The individual’s perspective  It examines the program costs and benefits to the program participant: person, a family, a company or a non-profit organization. CBA done from such a perspective often produce high benefit-cost ratios because the government or society subsidizes the program from which the participant benefits.
  7. 7. Government perspective  The analysis from a government perspective values costs and benefits from the point of view of the funding source.  It is basically a financial analysis, examining the financial costs and the direct financial benefits to the government.
  8. 8. Social perspective analysis  This analysis takes the perspective of society as a whole, the broader results of a program must be considered.  A good measure of costs and benefits for an individual or organization are market prices, however they might not accurately reflect the true value to society. For example, society’s opportunity costs are different from the opportunity costs incurred by a participant in a program.
  9. 9. Strengths and Weaknesses  CBA looks at a program’s net worth.  An evaluator must address the issue of attribution or incremental effect before doing a cost-benefit analysis  The benefits and costs of a program often cannot be easily expressed in dollars.  CEA is sometimes used when it is too difficult to convert to monetary values associated with CBA.