COST BENEFIT ANALYSIS

COST BENEFIT ANALYSIS: 

COST BENEFIT ANALYSIS RAHUL SHARMA BM-010116 RAMJEE TIWARI BM-010121 PRASHANT AWASTHI BM-010108 MANISH KUMAR BM-010078 NIKHIL AGGARWAL BM-010091

COST BENEFIT ANALYSIS: 

COST BENEFIT ANALYSIS CBA is the implicit or explicit assessment of the benefits and costs (i.e., pros and cons, advantages and disadvantages) associated with a particular choice. Benefits and costs may be monetary (pecuniary) or non-monetary (non-pecuniary, “ psychic ” ). CBA is an analytical framework used to assess the benefits and costs of policy proposals. CBA focuses on economic efficiency. It calculates the net benefits for each policy proposal. Takes a long-term view and incorporates all relevant costs and benefits.

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An individual will choose an action if: Benefits (B) > Costs (C) or Net Benefits (NB) = B - C > 0.

IMPORTANCE OF CBA: 

IMPORTANCE OF CBA Takes a community-wide perspective Allows the consideration of a range of policy options Determines which policy maximizes net benefits to the community Allows benefits and costs to be compared over time Can show the costs and benefits accruing to different groups within the community

BASIC STEPS IN A CBA: 

BASIC STEPS IN A CBA Specify the set of options Decide whose benefits and costs count (standing) Identify the costs and benefits and select measurement indicators Predict the impacts over the life of the regulation Attach dollar values to impacts Discount future benefits and costs to obtain present values Compute the net present value of each policy alternative Perform sensitivity analysis Make a recommendation

EXAMPLE: 

EXAMPLE A sales director is deciding whether to implement a new computer-based contact management and sales processing system. His department has only a few computers, and his salespeople are not computer literate. He is aware that computerized sales forces are able to contact more customers and give a higher quality of reliability and service to those customers. They are more able to meet commitments, and can work more efficiently with fulfillment and delivery staff.

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Costs : New computer equipment: 10 network-ready PCs with supporting software @ $2,450 each 1 server @ $3,500 3 printers @ $1,200 each Cabling & Installation @ $4,600 Sales Support Software @ $15,000

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Training costs: Computer introduction – 8 people @ $400 each Keyboard skills – 8 people @ $400 each Sales Support System – 12 people @ $700 each Other costs: Lost time: 40 man days @ $200 / day Lost sales through disruption: estimate: $20,000 Lost sales through inefficiency during first months: estimate: $20,000 Total cost: $114,000

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Benefits: Tripling of mail shot capacity: estimate: $40,000 / year Ability to sustain telesales campaigns: estimate: $20,000 / year Improved efficiency and reliability of follow-up: estimate: $50,000 / year Improved customer service and retention: estimate: $30,000 / year Improved accuracy of customer information: estimate: $10,000 / year More ability to manage sales effort: $30,000 / year Total Benefit: $180,000/year Payback time: $114,000 / $180,000 = 0.63 of a year = approx. 8 months

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Tip: The payback time is often known as the break even point . Sometimes this is is more important than the overall benefit a project can deliver, for example because the organization has had to borrow to fund a new piece of machinery. The break even point can be found graphically by plotting costs and income on a graph of output quantity against $. Break even occurs at the point the two lines cross. Inevitably the estimates of the benefit given by the new system are quite subjective. Despite this, the Sales Director is very likely to introduce it, given the short payback time.

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Key Points: Cost/Benefit Analysis is a powerful, widely used and relatively easy tool for deciding whether to make a change. To use the tool, firstly work out how much the change will cost to make. Then calculate the benefit you will from it. Where costs or benefits are paid or received over time, work out the time it will take for the benefits to repay the costs. Cost/Benefit Analysis can be carried out using only financial costs and financial benefits. You may, however, decide to include intangible items within the analysis. As you must estimate a value for these, this inevitably brings an element of subjectivity into the process.

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THANK YOU