Benefit – Cost Analysis
If you are faced with more than one decision and you want to optimize the outcome, then benefit-cost analysis is what you need. It goes beyond financial accounting. To make informed investment and policy decisions all of the positive and negative implications of that decision should be considered. Monetary investments and returns are the easiest to identify since their “price” can be readily determined but the analysis should not stop there. Benefits and costs that are not priced by a market should also be considered.
Benefit Cost Analysis – This analysis compares the cost of an activity or intervention with the return, or benefit of the activity. It helps identify the optimal path to achieve a given outcome Typically, both benefits and costs are weighted in monetary units. The results can be presented as a ratio or return on investment. (B/C ratio, IRR, ROI).
Cost Effectiveness Analysis (also known as “value for money”) – This analysis compares cost per outcome of two or more interventions. The metric helps identify how to achieve a higher level of positive outcome. Often by redirecting resources from other, less cost-effective, activities. Outcomes can be measured by non-monetary units such as additional years of life or decreased hunger). These typically are expressed as incremental cost per unit of benefit.
How You Benefit
Understanding the long-term value of investments is a key to sustainable decision making in profit and mission driven organizations. Benefit- cost analysis,
1) Simplifies decision criteria by converting benefits and costs to a single measure as appropriate. It may be financial, time, health, or natural resource metrics.
2) Provides a holistic assessment by uncovering and including non-market-based or “hidden” pros and cons.
3) Exposes risk by highlighting areas of uncertainty and how sensitive the outcome is to these areas.
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