Cost Benefit Analysis

Cost benefit analysis is an important techniques of assessing economic viability of a proposed project which examine all the relevant cost and benefits of the project to take a correct decision whether the specific project should be undertaken or not. These analysis is appropriate to select the best project among the available alternatives. Therefore the aim of these
analysis is to channel resources into best project which will yield the highest profit from its implementation. The profit may be commercial profit or social profit. The commercial profit refers to the net profit but social profit refers to the project's contribution to the national economy or social utility. Generally the commercial profitability is assessed in private project and social profitability in public project.

Private projects are interested in maximizing the net profit. So they considers only direct receipts and expenditure that affect net profit. Both receipts and expenditures are valued at prevailing market price for input and output. But they ignore the effect of external environment. So the investment decision based entirely on commercial profitability may lead a set of wrong decision from the point of social welfare. To calculate net social benefit, we need social measures of unit values of all project's inputs and outputs. Such social measures are often made by shadow-pricing. It means the cost and benefit analysis consider both direct and indirect cost in public projects. In this sense, cost benefits analysis is also known as social cost benefits.

Cost Benefits Analysis (CBA) evaluated the overall economic impact of the proposed project. It is used to select the most benefited project for investment after the comparison of all relevant cost and benefits. These analysis explains that all the proposed projects are appropriate to be undertaken which have higher benefits than cost or higher cost benefits ratio than one. But in case of mutually exclusive, a project having highest net profit or highest cost benefit ratio should be selected among the alternatives. Hence these analysis is used to find out the answer of the following questions:
  • Whether a specific project should be undertaken or not.
  • Which project should be selected from various alternatives?
  • Which time cycle must be beneficial to the project?
Procedures of Cost Benefit Analysis
  1. Determine the problem for which (CBA) Cost Benefit Analysis is needed.
  2. Identify the alternative solutions for the problems.
  3. Estimate the costs and benefits.
  4. Select the best solution/ alternative.

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