Cost-Benefit Analysis

Published Dec 27, 2022

Definition of Cost-Benefit Analysis

Cost-benefit analysis is a method of evaluating the costs and benefits of a project or decision. That means it is used to determine whether a project or decision is worth pursuing by comparing the costs and benefits associated with it. It is a systematic approach to decision-making that helps to identify the most cost-effective option.

Example

To illustrate this, let’s look at an example. Imagine a company is considering investing in a new software system. The cost of the software is USD 10,000, and the company estimates that it will save them USD 5,000 per year in labor costs. In this case, the cost-benefit analysis would compare the cost of the software (USD 10,000) to the estimated savings (USD 5,000 per year). The analysis would then conclude that the investment is worth it if the software can be used for more than two years because, in that case, the benefits outweigh the costs.

Why Cost-Benefit Analysis Matters

Cost-benefit analysis is an important tool for decision-making. It helps to ensure that decisions are made rationally and systematically rather than based on emotion or intuition. It also helps to identify the most cost-effective option, which can be especially important for businesses that are trying to maximize their profits. Finally, it can also be used to compare different options and determine which one is the most beneficial.