What is the purpose of a Cost-Benefit Analysis?

The significance of comparing aggregate costs and benefits in a Cost-Benefit Analysis (CBA) lies in its ability to provide a quantitative evaluation of the potential outcomes of a project or decision. By comparing the total expected costs against the total expected benefits, a CBA can help determine whether a project is financially viable and if the benefits outweigh the costs. This comparison can also aid in identifying the most optimal and efficient allocation of resources. Furthermore, it can assist in running a sensitivity analysis and proposing recommendations based on the computed net present values.

A Cost-Benefit Analysis (CBA) aids in making data-driven decisions by providing a systematic approach to estimating the strengths and weaknesses of alternatives. It can be used to determine if a decision or project is sound, or to choose between several possible options. The CBA does this by quantifying in monetary terms the expected costs and benefits of a decision or a project. This allows for a comparison to see if the benefits outweigh the costs, and by how much. Furthermore, it can also help in identifying any cost-effective changes to be made to a proposal or project.

The steps involved in conducting a Cost-Benefit Analysis are as follows:

1. Set the framework: Define the scope and objectives of your analysis.

2. Decide on costs and benefits: Identify all potential costs and benefits associated with the project or decision.

3. Determine and categorize: Classify the costs and benefits into tangible and intangible, direct and indirect.

4. Project, monetize and discount costs and benefits: Estimate the monetary value of the costs and benefits over the project's lifespan and apply a discount rate to find their present value.

5. Compute net present values: Subtract the total discounted costs from the total discounted benefits to get the net present value.

6. Run sensitivity analysis: Test the robustness of your results by changing the values of key variables.

7. Propose a recommendation: Based on the results, make a recommendation whether to proceed with the project or not.