This cost-benefit analysis (CBA) is a very useful tool for project management that allows determining if the benefits of a project exceed its costs, facilitating the evaluation of the viability of said investment.
He cost benefit analysis (CBA) is a most useful tool if you want to assess the feasibility of a project, well Allows you to compare costs and benefits in order to determine if the benefits outweigh the costs of said project.
This analysis is not only useful for the evaluation of business projects, it is also widely implemented for the evaluation of government projects, or social projects; In any of the cases, its preparation requires a meticulous and detailed process to specify the costs and benefits as well as possible, but it is not a complex process.
To better understand what it consists of and how it is made, let's see the following 2 examples of cost benefit analysis.
In this article you will find:
What is cost benefit analysis?
He cost benefit analysis (CBA) It is a tool used to evaluate the feasibility and economic impact of different projects or decisions, which involves comparing costs totals for a project with its benefits totals to determine if the project is financially viable and how much profit it can generate.
2 Examples of cost benefit analysis
Here are 2 examples of situations in which cost benefit analysis can be applied:
1 Example of cost benefit analysis for the construction of a dam
Carrying out a cost-benefit analysis for the construction of a dam requires considering multiple factors, including construction and maintenance costs, potential benefits and, most importantly, the environmental and social; this analysis that can be approached as follows:
- Identify the project: In this case, the project is the construction of a new dam.
Define and quantify costs:
- Construction costs: It includes all costs directly associated with the construction of the dam, such as materials, machinery, labor, engineering and design, permits, etc.
- Operation and maintenance costs: Consider the annual costs of operating, maintaining, and repairing the dam.
- environmental costs: These may include the loss of natural habitats, the impact on local species, and the possible repercussions of changing water flows.
- Social costs: Includes possible relocations of communities, change in the availability of water for communities nearby, impact on local economic activities (such as agriculture and fishing), among others.
Define and quantify the benefits:
- Hydroelectric power: If the dam is used to generate power, the benefits may include revenue from the sale of this power.
- Water supply: If the dam is used for water supply, the benefits may be the value of the water provided for domestic, agricultural, and industrial use.
- Flood control: If the dam helps prevent flooding, the benefits may be the avoided costs of flood damage.
- Recreation and tourism: If the dam creates a lake that is used for recreational activities, the benefits may be revenue generated from tourism and recreation.
- Determine the time horizon of the analysis: In the case of a dam, this horizon could be the expected life of the dam, which can be several decades.
- Discount of future costs and benefits: Since costs and benefits occur over time, you must discount future costs and benefits to get their present value. To do this, you need a discount rate, which can be complex to determine and can significantly influence the results.
- Compare total costs and total benefits: If the total benefits exceed the total costs, the project can be considered economically viable.
- Sensitivity and uncertainty analysis: Since cost-benefit analysis involves many estimates and assumptions, it is useful to test how the results would change with different assumptions to understand the uncertainty in the results.
- Prepare a report: Once the analysis is complete, you will need to present the results in a clear and understandable way, highlighting key assumptions and uncertainties.
2. Example of cost benefit analysis for the implementation of public health policies
Preparing a cost-benefit analysis for the implementation of public health policies is a complex and detailed process; Here is a step-by-step example of how you could do it:
- Identify the project or policy: Suppose the project is a mass vaccination campaign.
Define and quantify costs:
- Vaccine acquisition costs: Includes the cost of purchasing the necessary doses for the campaign.
- Implementation costs: This includes campaign logistics (transportation, storage, medical and support staff, promotional materials, etc.)
- Monitoring and evaluation costs: This includes the costs associated with monitoring the implementation of the policy, collecting data and evaluating its impact.
Define and quantify the benefits:
- Reduction of morbidity and mortality: The main benefit of a vaccination campaign is the reduction in the number of people who contract and die from the disease. This can be quantified in terms of quality-adjusted life years (QALYs) gained.
- Healthcare Cost Savings: This includes savings on hospitalizations, treatments and other health care costs that would be avoided thanks to the vaccination campaign.
- Increased economic productivity: Healthy people are more productive, which can have a positive economic impact.
- Determine the time horizon of the analysis: For a vaccination campaign, you might consider a time horizon that corresponds to the period during which the vaccine is expected to provide protection.
- Discount of future costs and benefits: As in any cost-benefit analysis, future costs and benefits must be discounted to obtain their present value.
- Compare total costs and total benefits: If the total benefits exceed the total costs, the policy can be considered economically viable.
- Sensitivity and uncertainty analysis: It is important to assess how the results would change under different assumptions to understand the uncertainty in the results.
- Prepare a report: Finally, the results of the cost-benefit analysis should be presented in a clear and understandable format, highlighting key assumptions and uncertainties.
“It is important to remember that although cost benefit analysis is a valuable tool for estimating the feasibility of a project, this analysis must be done in a manner very rigorous, quantifying all the costs and future benefits from an objective and reasonable point of view, because only then can it be assessed whether the benefits will compensate the costs.”