converge · Decision Making, Strategy · 60–240 min · 1-10 people · low energy

Cost-Benefit Analysis (CBA)

Cost-Benefit Analysis (CBA) is a systematic approach to evaluating decisions by comparing the total expected costs against the total expected benefits, typically expressed in monetary terms. It helps in choosing the most economically sound option by quantifying both tangible and intangible factors.

When to use Cost-Benefit Analysis (CBA)

Use CBA when you need to compare different project options or evaluate the overall impact of a program in quantifiable terms, especially when resource allocation decisions need to be justified with economic data.

What it solves

Difficulty in making strategic choices due to a lack of clear, quantifiable data; subjective decision-making processes.

How to run Cost-Benefit Analysis (CBA), step by step

  1. Define the scope of the analysis and identify all relevant costs and benefits. (15 min)
  2. Quantify costs and benefits, assigning monetary values where possible. (60 min)
  3. Discount future costs and benefits to their present value using an appropriate discount rate. (30 min)
  4. Calculate the Net Present Value (NPV) for each option by subtracting total discounted costs from total discounted benefits. (30 min)
  5. Conduct sensitivity analysis to test the robustness of the results to changes in key assumptions. (30 min)
  6. Interpret the results and make recommendations based on the CBA findings. (15 min)

Materials needed

  • Spreadsheet software (e.g., Excel, Google Sheets)
  • Calculator
  • Whiteboard or virtual whiteboard
  • Project documentation

Facilitator tips

  • Ensure all stakeholders agree on the scope and assumptions of the analysis.
  • Engage a professional evaluator experienced in CBA techniques for complex analyses.

Common pitfalls

  • Overlooking indirect or longer-term effects.
  • Failing to conduct sensitivity analysis, leading to unreliable results.
  • Difficulty in assigning monetary values to intangible benefits.

Variations

  • Social Cost-Benefit Analysis (SCBA) which incorporates social and environmental impacts.
  • Simplified CBA for smaller projects with fewer variables.

Running it online or hybrid

Use collaborative spreadsheets and virtual whiteboards to document costs and benefits. Ensure all participants have access to these tools and can contribute in real-time.

What it produces

A detailed report outlining all identified costs and benefits, their monetary values, and the resulting Net Present Value (NPV) for each option.

Origin

Adapted from BetterEvaluation — source

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