Cost Benefit Analysis is a preliminary computation of the possible expenses and revenue from particular business decision or proposal. Experts usually use quantitative and qualitative factors for the analysis. Experts use it to foresee the outcome, the trustworthiness, and the relevance of the opportunity, decision, or proposal.
Cost-benefit analysis has two main purposes:
- It determines if the profit of the decision prevails the costs (in another word if the decision is beneficial).
- Creates a foundation for comparing of the projects. It usually takes into account the total expected cost of each option against its total expected benefits.
CBA usually contains the following steps:
- Listing a couple of the alternative projects/decisions.
- Listing stakeholders.
- Choosing measurements and measuring the potential cost.
- Foreseeing the outcome of the operation/project/decision.
- Converting costs, benefits in a common currency.
- Applying discount rate.
- Calculating the net present value of the project/decision.
- Conducting sensitivity analysis.
- Adjusting the best choice – considering details.
Professionals also evaluate the risk of the project/decision. For this purpose, they usually use probability theory. Still, the same experts pay more attention to the steps to omit the risk. They simply prefer to omit the risk rather than get benefit/increase revenue.