Cost/Benefit Analysis

You may have been intensely creative in generating solutions to a problem, and rigorous in your selection of the best one available. This solution may still not be worth implementing, as you may invest a lot of time and money in solving a problem that is not worthy of this effort.
Cost Benefit Analysis or CBA is a relatively simple and widely used technique for deciding whether to make a change. As its name suggests, to use the technique simply add up the value of the benefits of a course of action, and subtract the costs associated with it.
Costs are either one-off, or may be ongoing. Benefits are most often received over time. We build this effect of time into our analysis by calculating a payback period. This is the time it takes for the benefits of a change to repay its costs. Many companies look for payback over a specified period of time – e.g. three years.
In its simple form, cost-benefit analysis is carried out using only financial costs and financial benefits. For example, a simple cost/benefit analysis of a road scheme would measure the cost of building the road, and subtract this from the economic benefit of improving transport links. It would not measure either the cost of environmental damage or the benefit of quicker and easier travel to work.

 

Tip:
The payback time is often known as the breakeven point. Sometimes this is more important than the 

overall benefit a project can deliver, for example because the organization has had to borrow to fund 

a new piece of machinery. The breakeven point can be found graphically by plotting costs and income 

on a graph of output quantity against $. Break even occurs at the point the two lines cross.