COST-BENEFIT ANALYSIS EXAMPLE
How To Calculate Cost Benefits Analysis With One Example
Cost-benefit analysis is a method through which businesses analyze programs, processes, or decisions to evaluate the additional value of such items.
You create a Cost-Benefit Analysis template by first determining the advantages of activity, including any associated expenses, and then subtracting the costs from the benefits. The analysis's finding provides factual data from which you can draw conclusive results about the possibility or of a scenario or decision.
The benefit-cost (b/c) ratio equation is calculated by multiplying the sum of all benefits by the total of all expenses, taking into account the timeframe of the decision. Choosing a PMP Certification Training Online course is a crucial decision on your path to not just pass the Project Management Professional examination but to better understand cost-benefit analysis and much more.
Step 1: Analyze lists
In Cost-Benefit Analysis Example, the first step is to develop an exhaustive list of costs and benefits related to the proposed action.
Step 2: Put a financial value on the costs and benefits
Once you've compiled two exhaustive lists of the action's costs and benefits, add monetary figures to each. After you've allocated prices to each cost and benefit, sum up all and generate the calculation.
Step 3: Equation and comparison
Add all the prices to the b/c ratio. The calculation must be quantitative, and it is appropriate to continue with the resolution of the numerical benefits outweigh the expenses. If not, the business or individual should reconsider the proposed action and make necessary changes. This method can be used to compare multiple choices next to each other.
Cost-Benefit Analysis Example
A fintech business is growing and has hired two additional programmers to help with the expansion. The business's CEO chooses to do a CBA to ascertain whether or not the choice will help the organization - and to what extent.
The organization is assessing a one-year timeframe and predicts that hiring the two programmers will raise revenue by approximately 50%.
On the expense side, the CEO should consider the expected $75,000 salary of two programmers. Also, there are costs associated with hiring, training, future work facilities, and desktops, including new software licensing. The overall cost, including direct and indirect expenses, would be approximately $89,000.
When assessing benefits, the CEO will consider the value of increased revenue over 12 months, which is considered to be approximately $100,000. Also, the increased perceived value resulting from the increased programmers will be 10%, delivering value support to the organization. The entire amount of benefits will be $110,000.
That is BCR = $110,000/$89,000, or 1.24, to use the benefit-cost ratio formula.
Based on the positive result, the CBA shows that hiring two new programmers will be a successful decision for the organization.
What Is a Cost-Benefit Analysis Template?
This Cost Benefit Analysis template includes a simplified worksheet for recording and estimating recurring and nonrecurring expenditures and earnings, and other benefits. The template calculates the annual sum over five years. The total sums for each category of benefits and risks stated on the first sheet are shown on the second sheet of the template, which allows for easy comparison between the two sheets. If you are a professional with expertise engaging in, leading, and managing enterprises, the PMP training course will assist you in preparing for and completing the PMP certification exam the first time.
This template includes a complete overview along with tables for listing data. You can update the template to incorporate information relevant to your assessment, like introducing and describing the project or considering alternatives, variables and limitations, specific costs and advantages to be emphasized, and suggestions based on the analysis results.
The Cost-Benefit Analysis template is critical for determining appropriate cost formulas and avoiding the risk of loss at the end. By applying analysis templates, you can instantly know the strategies to prevent these financial issues. This analysis is primarily focused on developing efficient costing procedures and evaluating inefficient cost calculations. After performing a proper assessment of the entire plan, you can easily raise your margins and eliminate unnecessary costs.
These templates include all vital components and formulas in the appropriate cells and instantly calculate specific amounts when entering a value. You can save effort, minimize missing out on crucial stages, and obtain more accurate results than you can with manual calculations. It is possible to assess lots of various factors at the same time and obtain precise conclusions.
Several dynamic and static components contribute to the complete analysis during data analysis. It is complicated to achieve these accurate results through manual calculating approaches and balancing findings for practical and magnificent strategies. This template allows the user to put values and relevant data in the selected area, and the conclusions will be calculated automatically. These templates include a variety of demographic functionalities that facilitate the presentation of data.
Components of Cost-Benefit Analysis Template
The following Components include a CBA template
1. Basic project specification
This section discusses the context where each analysis is performed, including the aims, the variables, the development lifecycle, etc.
2. Potential scenarios include the following
To determine which choice is the ideal in the CBA, we must weigh the costs and benefits. This section summarizes the solutions that have been studied during evaluation.
3. Determine the costs and benefits
This section describes the specific advantages and expenses associated with each of the particular circumstances. The application classifies these into two categories: those that are quite easy to calculate and those not so easy to calculate. Numerous elements must be addressed when assessing the costs of competing solutions in a CBA.
Aspects like activities, cost categories, operational expenses, overheads, depreciation, and total expenses must be considered.
- To begin, determine the benefits of the organization providing the service(s) to them.
- Some potential benefits for the service provider are productivity improvement, reduced workforce, or increased organizational efficiency.
- The final stage is to determine the benefit's value. If it is impossible to give a monetary value to a benefit, it must be assessed using the more subjective, qualitative evaluation system.
4. Scheduling Cost and Benefit:
In each option, the user now determines the value for every year of the decision's life cycle, beginning with the decision's inception. After estimating costs and benefits, transform them to a standard measurement system to allow for proper comparison of alternative strategies. This is managed by the process of discounting future monetary values that reduces future costs and benefits to their "market value."
The Present Value, or discounted price, of a future amount, is determined using the equation.
P = F (1/(1+I)n),
“P” represents the Present Value,
“F” represents the Future Value,
“I” represent the Rate Of interest, and “n” represents the number of years.
5. Alternatives comparative analysis
To support decision-making, the analysis is shown using tables and charts. After discounting the costs and advantages of each competitive proposal, compare and evaluate their discounted net values. If the lowest-cost alternative offers the largest discounted benefits, it is the preferable option.
6. Sensitivity Analysis
Sensitivity analysis determines the responsiveness and consistency of the CBA results. Given that the CBA is typically the most critical documentation in the investment evaluation process, reviewers would like to know that the assessment is accurate. Sensitivity analysis determines which input variables have the most impact on the consequence and then assesses the findings to discover which input variables are sensitive. Sensitive input variable estimations must be re-examined to verify they are as realistic as possible.
PMP training online is the recommended method of obtaining a PMP certification course since it enables you to learn from the convenience of your home or workplace without having to drive large distances.
Online PMP training can be adapted according to your time zone, allowing you to study at your own pace.