Cost Benefit Analysis

Synopsis

If you are in doubt about a certain decision, a potential project or particular changes your venture is about to undergo, you need a reliable evaluation tool. Our Cost Benefit Analysis presentation empowers you to get the most out of every proposal and idea, identify the highest and most optimal return on an investment based on the cost, resources and risks involved and make data-driven, precise decisions.

Questions and answers

How can companies implement Cost Benefit Analysis in their decision-making process?

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Companies can implement Cost Benefit Analysis (CBA) in their decision-making process by following these steps:

1. Identify the potential costs and benefits associated with the decision or project. This includes both tangible and intangible factors.

2. Quantify these costs and benefits in monetary terms as much as possible.

3. Compare the total expected costs against the total expected benefits.

4. Make a decision based on this comparison. If the benefits outweigh the costs, then the decision or project is likely a good one. If not, it may need to be reconsidered.

What are the practical applications of Cost Benefit Analysis in the finance industry?

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Cost Benefit Analysis (CBA) has several practical applications in the finance industry. It is used to evaluate the potential return on investment for various projects or decisions. This includes assessing the cost, resources, and risks involved in a project to determine its viability. CBA can also be used to compare different investment options to identify the most optimal return. Furthermore, it aids in making data-driven, precise decisions by providing a quantitative basis for decision-making.

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Slide highlights

Using this slide, set the framework, decide on costs benefits, determine and categorize, project, monetize and discount costs and benefits, compute net present values, run sensitivity analysis and propose a recommendation.

With this slide, you can compare aggregate costs and benefits. Remember that the results of the aggregate costs and benefits analysis should be compared quantitatively to see if the benefits outweigh the costs.

Summarize the overall value for money of a project or proposal with this slide which helps to calculate Benefit-Cost Ratio (BCR). The formula is as follows: BCR = Discounted value of benefits/ Discounted value of costs.

Overview

A cost-benefit analysis process allows businesses to analyze decisions, systems, projects and processes, as well as discover value for intangibles. The pros of using cost-benefit analysis lay in its data-driven approach, division-making simplification and, most importantly, an opportunity to uncover hidden costs and benefits.

Questions and answers

Can you provide an example of a situation where cost-benefit analysis can be effectively used?

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A cost-benefit analysis can be effectively used when a company is considering a new project or investment. For example, if a manufacturing company is considering purchasing a new piece of machinery, they would conduct a cost-benefit analysis to evaluate the costs of purchasing and maintaining the machine against the benefits it would bring, such as increased production capacity or improved product quality. This analysis would help the company make an informed decision about whether the investment is worthwhile.

What is the role of cost-benefit analysis in resource optimization?

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Cost-benefit analysis plays a crucial role in resource optimization. It allows businesses to analyze decisions, systems, projects, and processes, and discover value for intangibles. It provides a data-driven approach to decision-making, simplifying the process and uncovering hidden costs and benefits. This helps in identifying the most optimal use of resources, ensuring that the benefits outweigh the costs, and ultimately leading to more efficient and effective resource allocation.

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Application

Harvard Business School (HBS) Online suggests the following steps when conducting a cost-benefit analysis:

1. Establish a framework for your analysis

For your analysis to be the most precise, you must first establish the framework within which you're conducting it. What exactly this framework looks like will depend on the specifics of your organization.

2. Identify your costs and benefits

Put together two separate lists: one for all of the projected costs, and one for the expected benefits. When calculating costs, you'll probably begin with direct costs, such as labor costs, manufacturing costs, materials costs, and inventory costs.

Cost categories you must account for are:

• Indirect Costs
• Intangible Costs
• Opportunity Costs

And benefits can include:

• Direct
• Indirect
• Intangible
• Competitive

3. Assign a dollar amount or value to each cost and benefit

Once the lists of all costs and benefits are completed, a dollar amount must be assigned to each of them. Direct costs and benefits will be the easiest to assign a dollar amount to. Indirect and intangible costs and benefits, however, can be more challenging to quantify. To calculate indirect and intangible costs and benefits, research and use special software.

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4. Tally the total value of benefits and costs and compare

When every cost and benefit has a dollar amount assigned, tally up each list and compare them. In case the total benefits outnumber total costs, it makes sense to proceed with the project or decision. If total costs outnumber total benefits, the proposal needs to be reconsidered. If the costs outweigh the benefits, see if there may be any alternatives to the proposal that your team hasn't yet explored and considered. Also, look into identifying cost reductions that will allow you to reach your goals in a more affordable manner while still being effective, HBS Online suggests.

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Case study

Spendedge

A UK procurement intelligence solution provider, SpendEdge, completed a complex cost-benefit analysis study for a healthcare industry firm based in Texas, United States (the firm chose to remain anonymous). As a result, cost-benefit analysis improved the organization's overall savings by 20%.

"Today, it is essential for any organization to analyze costs and inventories. Additionally, as businesses grow, their sourcing needs become more complex, making it a necessity to analyze maverick spend, delivery times, and cost elements across the supply chain. The cost-benefit analysis also helps firms make the best use of the suppliers' capabilities," SpendEdge said in a press release.

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The intelligence solution provider's analysis strategies helped the client to:

• Obtain a complete overview of the cost developments within the entire healthcare industry
• Evaluate the strengths and weaknesses and control indirect costs

SpendEdge's analysts said: "By using the right cost-benefit analysis template, businesses can identify the highest ROI based on price structures, resources, and associated risk factors."