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Cost/Benefit Analysis September 2, 2005

Posted by Coolguy in Business Analysis.
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  • Cost/Benefit Analysis is a relatively simple and widely used technique for deciding whether to make a change.
  • As its name suggests, to use the technique simply add up the value of the benefits of a course of action, and subtract the costs associated with it.
  • Costs are either one-off, or may be ongoing.
  • Benefits are most often received over time.
  • Many companies look for payback over a specified period of time – e.g. three years.
  • In its simple form, cost/benefit analysis is carried out using only financial costs and financial benefits
  • For example, a simple cost/benefit analysis of a road scheme would measure the cost of building the road, and subtract this from the economic benefit of improving transport links. It would not measure either the cost of environmental damage or the benefit of quicker and easier travel to work
  • A more sophisticated approach to cost/benefit analysis is to try to put a financial value on these intangible costs and benefits.
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