Cost benefit Analysis

Cost benefit Analysis: 

Cost benefit Analysis is Analysis undertaken to judge any project or investment whether government or private and find out its worth and facilitate its comparison with other available opportunities of investment. In other words we can say CBA finds out the worth of an investment by ranking optional investment. Before taking up an investment one must judge its cost and benefits. It can be adopted at Macro and Micro level. BY – ABHISHEK VARSHNEY

Why are Investment Decisions Important: 

Why are Investment Decisions Important Investment decisions are important because Investment fund are limited whereas options are unlimited. They have different degrees of uncertainty and returns For government investment for public goods and for social objectives Decisions not irreversible in the long run

Steps in CBA : 

Steps in CBA Identification of a Project that means search for investment opportunities Identify Size of Investment with his own expertise and interest 2. Formulation of Project: Once a list of projects chosen with a blue print and all details of requirement of land , building, plant, labour , raw materials, fuel, power, technocrats etc with prices of each one can proceed further 3 . Creation of Capacity and its Utilisation : 4 . Decide prices at which products can be sold

Contd: 

Contd 5. Examination of Feasibility Technical feasibility: availability of land, plant, machinery , raw material and technical know how Financial feasibility: availability of Finance on time and at reasonable rate Economic Feasibility: prospects of employment generation development of backward areas, social groups Management Feasibility: availability of management professionals for implementing and running the project, smoothly and professionally Projects selected or dropped according to feasibility

Contd: 

Contd 6. Appraisal and selection of the Project: feasible projects are appraised with the help of cash out flows and inflows (Cash outflows –investment on land , labour , machinery etc, cash inflows –cash generated through sale of a product)then comparing different feasible projects and deciding on merit. 7.Comparison of cash flow: projects passing the third test of feasibility are tested by cash flows by using cost benefit ratio. Several outcomes through different methods. Helps comparing rates of returns, risks involved. A project of promising high returns with high uncertainity or low profitability with low risk level can be selected.

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8.Selection and implementation: Implements the project according to the blue print prepared . monitor the project on a regular basis Like regular time period practiced Ascertain ting quality and quantity are as per norms assumed Market of product Industrial relations Repayment of loans and payment of dividends

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9. Mid term project evaluation: A past completion audit of the project is the last step. For long term project mid term appraisal is always desirable. Comparison of measures of investment worth in the beginning at the end.If results obtained or not. If not what are the causes. Thus such results help rectifying mistakes and improving upon the performance.

Justification of CBA : 

Justification of CBA 1.Social Cost and Benefit: Private sector should look for social benefits and cost involved in their private projects and take necessary measures. 2.Intangible Factors: The prestigfe of the business firm , the reputation or the image of the firm in the market, morale of the employees , the long standing tradition of the company or the ideas and values inherited by a company over the long period of its existence . NPV or IPR can be guides for acceptance or guidance of a project. Shadow Pricing can be adopted for computing cost or benefits of such intangible factors.

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Overall Profitability: rate of criteria for investment would mean smaller investment and high rate of returns . Certain Uncertainty VS Uncertain Certainty: Uncertainty in this competitive world investors try to minimize uncertainty. Some projects would involve uncertainty when incorporated in the measures adopted. Investor faced with a choice of certain uncertainty. Investors would prefer an uncertainty which is certain I.e. estimable

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Social Scale Preference: Private Sector has a social obligation towards society CBA helps in incorporating social scale of preferences into the appraisal of an investment proposal . National industrial Policy: A set of economic policies including industrial policy given by government. besides we have EXIM policy, MRTP, Monetary and Fiscal Policy.

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7. Future Disposable income: CBA is used fro finding worth of investment with a certain periodicity like a year or two years. This helps to review performance of a firm and also provides basis for Mergers and Acquisitions. Therefore in this world CBA from time to time is become a need . 8. Unforeseen Circumstances : I nspite of systematic planning contingencies and eventualities like natural calamities, wars, riots etc. It needs urgent steps CBA can be of great help.

CBA and overall resource allocation : 

CBA and overall resource allocation Macro Economic Policy is framed by Government to meet social objectives in a market economy. Correction of Shocks and Disturbances: For adjustment of free market economy to shocks and disturbances in the Economy government has to formulate a policy Speeding up the pace of the economy: For meeting desired level of objectives if the economy and speed up its pace government is necessary. Weeding out economic evils: Unemployment, inflation, business fluctuations are economic evils which need to be eradicated by adopting Macro Economic policy instruments Structural changes in the Economy: to make adjustment to these changes government legislations and regulation is necessary Fine tuning of the economy: if economy deviates from normal and competent course government Macro Policy needed.

Public vs Private Goods: 

Public vs Private Goods Public good Private Good Satisfies a collective want Individual want Provided by Government By producers, traders, consumers and concerned people Indivisible Each part sold separately to an individual without any external affect on the other It requires collective action in terms of their provision Private goods provided by the market Allocation of resources by public choice By market mechanism