Cost Benefit Analysis

last edited by: Aejaz Shaikh on Feb 21, 2017 4:21 AM login/register to edit this page

Contents
1 Applications
2 Procedures
3 Instructions
4 Examples
5 Reference

A technique to compare the total cost and the total benefit of a proposed solution. Both tangible and intangible factors need to be addressed and taken into account. Components may include:

  • cost of labor
  • equipment
  • support services
  • intangible factors, such as cultural impacts, customer satisfaction, or control savings factors, such as current expenditures vs. future expenditures
  • Although often treated as unquantifiable, intangibles also can and should be quantified.

    Cost Benefit Analysis (CBA) - Deciding, Quantitatively, Whether to go Ahead. Is a quick and simple technique that you can use for non-critical financial decisions. CBA can be applied to quality as well, a is a quick and simple technique that you can use for non-critical financial decisions.

    Applications

  • To determine payback and/or rate of return for an enterprise change project.
  • To take decisions about whether an action (project, program, policy, process) should or not be implemented.

Procedures

  1. Obtain complete cost estimates.
  2. Obtain complete benefit estimates.
  3. Choose an appropriate Cost Benefit Analysis (CBA) algorithm to analyze the cost and benefit streams.
  4. Compute estimated costs and benefits schedule over time to determine the payback period.
  5. Make recommendations, and set next steps as required.

Instructions

Collect and confirm the various costs associated with the project alternatives or implementation strategies. Refer to Cost Estimation and Benefit Estimation techniques for details to derive costs and benefits respectively.

The payback period criterion will be used to assess the desirability of alternative projects or strategies. The objective is to choose the project or strategy which recovers its capital costs in the shortest period. Applying this principle to the table in Figure 1, it is apparent that, in the fourth month (April), the benefits outstrip the costs. It is at this point that total benefits to-date ($41,000) exceed total costs to-date ($30,000). Another effective way of presenting this data is to plot a curve representing cumulative net value (costs minus benefits) of the project over time and show where this curve intersects the break-even point (a straight line at the point where cumulative net equals zero, see Figure 2).

Careful consideration should be given to quantifying intangible factors, such as cultural impacts (e.g., quality of work life, empowerment vs. control, incentive system, etc.) since these factors weigh heavily in most Process Redesign and Reengineering efforts. Intangible costs and benefits should be conservative and readily defensible. For this reason, a method for quantification which is a standard practice within the organization should be used, if possible.

The process for quantifying costs and benefits should be confirmed by the project sponsors or reference groups, early in the task, and any assumptions should be clearly delineated. Most stakeholders can identify the contribution of improvements in organizational effectiveness, resulting from the process change (e.g., improved time to market translates into increased revenues; increased job satisfaction translates into improved performance/productivity). When probed, most of these contributions can be converted into hard dollars. If organizational standards are not available, work with project stakeholders to compute intangible benefits and costs in this manner.

Examples

Representations of Payback

Figure 1

Figure 2

Sometimes it is difficult to estimate the benefits with non monetary values, eventhough cost/benefit analysis demonstrated to have the potential to help on getting results in these cases. A typical case is the cost/benefit analysis for government projects, when public value replaces the typical monetary value.

Reference

  1. Steven H. Spewak. Enterprise Architecture Planning: Developing a Blueprint for Data, Applications and Technology. QED Publishing Group, 1993.
  2. COST-BENEFIT ANALYSIS Concepts and Practice 4th Edition. Anthony Boardman, David Greenberg, Aidan Vining, David Weimer. Pearson Publishing, August 27, 2010.
  3. Cost-Benefit Analysis: Financial And Economic Appraisal Using Spreadsheets 2nd Edition. Harry F. Campbell, Richard P.C. Brown. Routledge Publishing, July 25, 2015.


last edited by: Aejaz Shaikh on Feb 21, 2017 4:21 AM login/register to edit this page


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