Cost-benefit analysis involves the appraisal of a project proposal. It aims to determine whether or not a project is worth pursuing, based on a comparison between the potential benefits of a project and the anticipated costs or risks it entails.
Oftentimes, the data gathered for a cost-benefit analysis is translated in terms of money. The value assigned depends on the amount’s time value, which simply means that interest rates over a given period of time are taken into account in the computation. By doing this, you can come up with a fairly reliable analysis showing the actual profit and cost of the project over a certain period.
There are certain conditions or events that are more challenging to quantify, but nevertheless have an effect on the amount of benefit to be gained from the project. Monetary values are also assigned to these factors, as they may pose added risks that need to be accounted for. Examples of these are low investor confidence, attrition, or negative public opinion, among many other possible factors.
Cost-benefit analysis is not just employed by businesses and corporations. Governments also make use of this in the creation of strategies and in other instances of decisionmaking.
Social Return on Investment analysis is another technique which is somewhat related to cost-benefit analysis. Although SROI may be associated with CBA to a certain extent, its objectives are quite different. The main aim of SROI is to help a company make decisions which minimize any negative social or environmental impacts, as well as maximize the positive impact of the company in these areas.