1. Understanding Costs and Benefits Analysis Business Economics Fall Semester 2011 Standard A5

2. Standard After this lesson you will be able to … – Demonstrate an understanding of costs and benefits analysis by giving real-world examples which properly evaluate alternatives.

3. Cost-benefit analysis (CBA), sometimes called benefit-cost analysis (BCA), is an economic decision-making approach CBA is used in the assessment of whether a proposed project policy is worth doing, or to choose between several alternative ones. It involves comparing the total expected costs of each option against the total expected benefits, to see whether the benefits outweigh the costs, and by how much.

4. Valuation The costs of an intervention are usually financial. The overall benefits of a government intervention are often evaluated in terms of the public's willingness to pay for them, minus their willingness to pay to avoid any adverse effects.

5. A cost benefit analysis is done to determine how well, or how poorly, a planned action will turn out. Although a cost benefit analysis can be used for almost anything, it is most commonly done on financial questions. A cost benefit analysis finds, quantifies, and adds all the positive factors. These are the benefits. Then it identifies, quantifies, and subtracts all the negatives, the costs. The difference between the two indicates whether the planned action is advisable.

6. Cost Benefit Analysis – Purchase of New Stamping Machine (costs per month)  Purchase of Machine.................... -$20,000 Installation of Machine..................... -3,125 Increased Revenue.......................... 27,520 Quality Increase Revenue..................... 358 Reduced material costs...................... 1,128 Reduced Labor Costs....................... 18,585 New Operator................................. -8,321 Utilities............................................ -250  Insurance......................................... -180  Square footage...................................... 0  Net Savings per Month........................... $15,715

7. It Doesn’t Have To Be Monetary For example, road safety can be measured in terms of 'cost per life saved', without placing a financial value on the life itself.