Cost Benefit Analysis Flashcards, test questions and answers
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What is Cost Benefit Analysis?
Cost benefit analysis is a method of evaluating potential investments or projects by assessing the costs associated with them and comparing them to the expected benefits. This type of analysis helps organizations make decisions that are in line with their goals, as well as provide an objective way to compare different options. It can also be used to evaluate existing investments or policies and determine whether they should continue or be modified. The main components of cost benefit analysis include identifying all relevant costs and benefits, assigning monetary values to these elements, calculating net present value (NPV) for the project or investment, and determining if it has a positive return on investment (ROI). Costs typically include initial expenditures, operating expenses such as labor and materials, and overhead related items like taxes. Benefits are generally considered from both financial perspectives such as increased revenues due to new customers as well as non-financial factors like improved customer satisfaction. When assigned dollar values for both costs and benefits have been established, NPV is calculated by subtracting total costs from total benefits over time. If this number is positive, then an organization has met its goal of generating more money than was initially invested in the project or investment. In addition to helping organizations decide which projects will create value for them financially, cost benefit analysis can help inform decision making when it comes to social issues such as public health initiatives or environmental regulations. For example, if a company wants to reduce pollution levels in its area but doesn’t want spend too much on doing so, it can use a cost benefit approach in order to identify the most effective methods that won’t break its budget while still achieving desired results. Overall, cost benefit analysis provides organizations with an efficient way of assessing potential investments while considering both financial objectives and broader social considerations at once. By appropriately weighing all relevant factors into consideration prior to investing resources into any given project or policy initiative; companies can ensure better returns on their investments while also contributing positively towards society at large.