PA 650 (WANG Chp 6) Cost Benefit Analysis
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Cost-benefit analysis (CBA)
- Assesses the economic feasibility of a program, a policy, or activity. Rationalizes decision making through careful examination of a program's objectives and the costs and benefits associated with the program.
- Step 1: Formulating the Question in Cost/Benefit Analysis
- Step 2: Determining the Benefit
- Step 3: Determining the Cost
- Step 4: Determining the Discount Rate
- Step 5: Calculating the Net Present value
- Step 6: Making Decisions
Net Present Value (NPV)
For the purposes of comparison the future value of costs and benefits must be converted to the present value. NPV = Present Value of Benefits (PVB) - Present Value of Costs (PVC)
Present Value of Benefit (PVB)
Benefit in its value of the present day.
Present Value of Costs (PVC)
Cost in its value of the present day.
Achievable project Objectives
Objectives of projects whose designated results can be empirically observed. Having achievable project objectives is necessary to measure the benefits of a project in a cost-benefit analysis.
Mutually inclusive project objectives
A consideration in measuring and calculating the benefit in a cost-benefit analysis. There are cases of cost-benefit analysis in which completion of a project objective affects another objective. Caution should be exercised to avoid double counting of benefits in these cases.
Mutually exclusive project objectives
A consideration in measuring and calculating the benefit in a cost-benefit analysis, which requires that the completion of a project objective does not affect another objective.
Measurable and quantifiable project objectives
A necessary condition to assess project benefit in a cost-benefit analysis is that the project objectives can be quantified and measures can be developed to estimate the achievement of the objectives.
Project (accounting and financial) cost
The summation of all resources consumed by a project during its lifetime. Project cost is different from the opportunity cost that concerns the value forgone by doing the project.
The value of the best alternative foregone. it is a useful concept in estimating the cost of a project in a cost-benefit analysis.
Opportunity rate of return
The return of the best alternative to a project.
Outcomes of a project
A project's intermediate or long-term impact and achievement.
Outputs of project
A project's direct products or immediate effects.
Cost-effectiveness analysis (CEA)
A tool to estimate the cost and effectiveness of a project.
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