▷ Cost Benefit Analysis (CBA): Definitions and Steps

  • May 18, 2023
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Cost benefit analysis is a useful tool for evaluating and comparing different options or projects by considering both costs and associated benefits, facilitating more informed decision making when determining whether the expected benefits justify the costs incurred.

He cost benefit analysis (CBA) is a very useful tool since as a company grows and keeps going, it is necessary to know how the business performance, how and how much money you spend, and whether you are getting return on investment expected.

cost benefit analysis (CBA)


Well, through cost benefit analysis can estimate the profit margin and make better investment decisionsfrom a more objective and rational point of view.

In this article you will find:

What is cost benefit analysis (CBA)?

Cost-benefit analysis (CBA) is a tool used to evaluate and compare the costs and benefits of different options or projects; It is used in different areas, such as economics, business management, and government decision-making.


This analysis (ACB) aims to determine whether the benefits of an action or investment outweigh the associated costs; To do this, both the costs and benefits involved in a particular option are identified and quantified.

What is cost benefit analysis (CBA) useful for?

Cost-benefit analysis is useful in various situations and contexts, whether in a business, government or even personal level. Some of the main utilities of the ACB are the following:


  • It allows evaluating different options or alternatives and determining which of them offers the most favorable relation between costs and expected benefits; this helps to select the most profitable and efficient option.
  • It is especially useful when evaluating the feasibility of a project or an investment; since it allows estimating the costs involved and the benefits expected over time, which helps determine if a project is feasible and if the benefits justify the costs.
  • Help allocate limited resourcesefficiently and effective; since, by comparing the costs and benefits of different options, it can be determined which ones deserve a greater investment and which ones can be discarded or postponed.
  • Is useful for evaluating the impact of public policies or government programs, making it possible to compare the costs and benefits of different approaches and determine which may be more effective and profitable in social, economic and environmental terms.
  • Facilitates business investment analysis by assessing the expected financial costs and benefits, helping to determine whether an investment will generate sufficient returns to justify the resources invested and to compare different opportunities of investment.

6 Steps to perform a cost benefit analysis (CBA)

Basic steps to carry out a cost benefit analysis in a systematic way:

1. Identify and list relevant costs and benefits

The first step is to identify and list all costs and benefits expected as a result of the option or project under consideration.


This includes both direct costs (such as costs of acquisition, maintenance, personnel, etc.) as the indirect costs (such as lost opportunities, depreciation, training costs, etc.). Similarly, one must identify the tangible benefits (additional income, cost savings, etc.) and intangibles (improvement of the company's image, quality of life, etc.).

2. Quantify costs and benefits

To the extent possible, toassigns monetary values ​​to the costs and benefits identified in the previous step; this implies estimating the amounts in terms of money, either through historical data, expert estimates or market research.


Some costs or benefits may be more difficult to quantify, in which case alternative valuation methods or approximations may be used, such as the opportunity cost method.

3. Calculate the cost benefit net (CBN)

The CBN is calculated by subtracting the total sum of the costs from the total sum of the benefits, (CBN = Total benefits – Total costs).

A positive CBN indicates that the benefits outweigh the costs, while a negative CBN indicates that the costs outweigh the benefits.

4. Apply valuation techniques

In addition to CBN, you can use other techniques to evaluate the results of the cost-benefit analysis.

For example, him Net Present Value (NPV) Consider the time difference between costs and benefits, applying a discount rate to reflect the time value of money. The Internal Rate of Return (IRR) is another technique that calculates the rate of return required for the benefits to equal the costs.

5. Consider qualitative aspects:

Although the cost-benefit analysis is mainly based on monetary values, it is also important to consider qualitative and non-monetary aspects. This includes social, environmental, ethical or image impacts, which can be difficult to quantify, but must be taken into account in decision making.

6. Interpret the results and make decisions

Finally, iInterpret the results obtained from the cost-benefit analysis and use them as a basis for decision making.

If the CBN is positive and the valuation techniques are favourable, this indicates that the option or project is viable and offers benefits greater than the costs; however, if the CBN is negative or the valuation techniques are not favourable, it may be necessary to review or discard the option under consideration.

Advantages and disadvantages of cost benefit analysis (CBA)

Although CBN is a very useful tool, it is important to consider its advantages and disadvantages before its application-


  1. Data-driven approach: The cost-benefit analysis is based on quantitative data and the allocation of monetary values, which provides a basis objective for decision-making, therefore, it allows comparing different options in a systematic and evidence-based manner.
  2. Consideration of full costs and benefits: The cost-benefit analysis takes into account both direct and indirect costs, as well as tangible and intangible benefits; this helps to capture a more complete picture of the impacts of the options or projects considered.
  3. Informed Decision Making: By evaluating costs and benefits, cost-benefit analysis provides a framework that helps make more informed and rational decisions; Therefore, it allows comparing different alternatives and selecting the one that provides the most favorable relationship between the expected benefits and the costs incurred.
  4. Consideration of non-monetary factors: Although it is mainly based on monetary values, the cost-benefit analysis can also consider qualitative and non-monetary aspects, such as social, environmental or ethical impacts; this helps to take into account a broader range of considerations in decision making.


  1. Difficulty in quantifying some aspects: Some costs and benefits may be difficult to quantify or assign a monetary value, especially when dealing with of intangible benefits, which can generate some subjectivity in the evaluation and limit the precision of the results.
  2. Simplification of impacts: Cost-benefit analysis tends to simplify impacts by assigning monetary values ​​to costs and benefits; this can lead to an underestimation or lack of consideration of important aspects that cannot be easily quantified.
  3. Dependence on assumptions and data: is based on assumptions and data available at the time of analysis; furthermore, these assumptions and data may change over time, which may affect the accuracy and validity of the results.
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