Cost-benefit analysis (CBA)

Last updated: 16.03.2016

Cost-benefit analysis (CBA) is the analysis that is used to summarize and evaluate costs and benefits relevant with certain decision, project or investment. The main stress is on monetary costs and benefits, but non-monetary ones shall also not be neglected. The monetary effects are often discounted to adjust them for time-value effects.

 

CBA is used as:

  • a quantitative summary of changes resulting from the evaluated decision/project/investment
  • part of feasibility analysis
    • a basis for the calculation of indicators used for decision/project/investment evaluation  (such as NPV, IRR, ROI, payback period) and making a decision whether or not to accept it
  • basis for preparation project/investment plan

 

The relevant costs and benefits (or cash outflows and inflows) are only those that are associated with the decision/project/investment. 

 

They therefore include:

  • differential future costs and benefits
  • opportunity costs
  • sales value at the disposal of the investment
  • tax effects

They therefore do not include:

  • past (sunk) costs
  • irrelevant (uncontrollable) costs
  • and in case of discounted cash-flow method also:
    • non-cash costs and income
    • interest charges as they are already covered in the discount rate


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