Are you thinking about completing a cost benefit analysis? This technique is very helpful when you're trying to determine if a project is a sound investment or when you are trying to determine which of two projects will produce better results. With this type of analysis you'll compare the price of each option overall with the expected benefits. Your goal would be to see which project has benefits which outweigh the costs and how much of a difference exists between the two.
This type of analysis differs from one that looks at how cost effective a project is. Here the costs and benefits are expressed in dollar amounts. This allows these amounts to be adjusted with time in terms of time value for money. If this method is used, all benefits and project costs can be looked over with regards to the present value. Be sure you don't confuse this accounting method with economic impact analysis, cost-utility analysis or Social Return on Investment analysis.
Business and governments utilize cost benefit analysis to determine if a project should be completed or perhaps a policy implemented. When this strategy is used, many factors are looked at. Foregone alternatives are just one factor that is considered to find out if a policy is going to be effective. Here the status quo may also be examined to see if keeping things how they are would be better.
If you use this process of analysis, you are able to better select which projects will produce the most results at the very least cost. Be aware that, when used for social welfare projects, there's no foregone conclusion. Many other factors play a role on this like human behavior therefore the analysis is more of a best guess. It is possible to put a program into place, but you can't force people to use it if they do not want to.
To be able to complete a cost benefit analysis, there are certain steps that need to be taken. First a list of projects to be compared should be completed after which key players must be determined. Determine how you'll measure costs and benefits and collect this data. You'll then need to look at the complete project and predict the outcome of the costs and benefits.
Costs and benefits must be put into dollar amounts when performing this kind of analysis. If a discount rate exists, it should be applied before you calculate the net present value of the various options. Finally a sensitivity analysis need to be done before recommendations can be created as to which project or projects ought to be chosen.
When completing a cost benefit analysis, you need to examine any risks that may develop as a result of choosing a particular project. Probability theory can be quite helpful here. Factor this into the discount rate or use it separately. The choice is up to you, but make certain your focus is on risk aversion.
A sensitivity analysis must also be performed. This shows how, if parameters are changed, the results may also change. There are lots of methods to complete this step and you will need to choose the one that is ideal for your needs.
