What is Cost Benefit Analysis?

Seneca et al (1984) define Cost Benefit Analysis as, “the systematic estimate of all benefits and all costs of a contemplated course of action in comparison with alternative courses of action” (pp. 10). Or in other words, Cost Benefit Analysis is the business and financial technique of assessing the practicability of a scheme or package.

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Cost Benefit Analysis is determined through the methodical listing of the benefits of the scheme and also calculating the costs that would be incurred to complete the project. Cost Benefit Analysis scores over the conventional methods of assessment as the calculation also takes into account factors such as opportunity cost, the cost of externalities and costs of intangible resources.

What are the uses of Cost benefit Analysis?

Cost Benefit Analysis is one of the popular methods used in the procedures related to decision making. Cost Benefit Analysis can be used for various purposes such as in forecasting the regional and urban environment, in private projects, in tying together sustainable management with economic control. Cost Benefit Analysis is also being widely used in the form of an applied tool in the modelling of risk management because of its inclusion of economic assessments of the project along with the environmental as well as the social factors that are involved in the project. In fact, Cost Benefit Analysis is one of the basic tools that can be used in all public decision making that relate to investments using public funds, in formulating environmental regulations, in carrying out developmental programmes and so on.

How are the calculations of Cost Benefit Analysis carried out?

The factors that are included for the calculation are assessed by using a common denominator of money so the direct comparison of their sizes, levels and extents. The costs of these factors are deducted and those of the benefits are added. The results of these calculations would then aid in the decision of whether to go ahead with the project or not according to the positive or negative outcome.

What are the constraints of Cost Benefit Analysis?

When Cost Benefit Analysis is used in the public dominion, the results and the techniques used for the assessment may be influenced by political issues. Moreover, the costs and the personnel involved in conducting Cost Benefit Analysis may also be a constraining factor, especially in the poorer countries which have a shortage of both these factors. The developing countries could be planning to carry out these projects using loans with a high rate of interest and may not be able to afford the expensive Cost Benefit Analysis also added to their expenses. Other factors such as constraints could be the lack of adequate information, and uncertainties.

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