Industry Data & Market Research

Strategic Planning with the Cost-Benefit Analysis Framework

Cost-Benefit Analysis is a technique that enables better strategic planning in business.

Cost Benefit Analysis is typically used by governments to evaluate the desirability of a given intervention. It is used to measure non-monetary as well as monetary costs and benefits to see if the benefits outweigh the costs. The aim is to gauge the efficiency of the intervention relative to the status quo. The costs and benefits of the impacts of an intervention are evaluated in terms of the public's willingness to pay for them (benefits) or willingness to pay to avoid them (costs). Inputs are typically measured in terms of opportunity costs - the value in their best alternative use. The guiding principle is to list all of the parties affected by an intervention, and place a monetary value of the effect it has on their welfare as it would be valued by them.

The practice of cost-benefit analysis differs between countries and between sectors (e.g. transport, health) within countries. Some of the main differences include the types of impacts that are included as costs and benefits within appraisals, the extent to which impacts are expressed in monetary terms and differences in discount rate between countries. Agencies across the world rely on a basic set of key cost-benefit indicators, including:
  • PVB (present value of benefits);
  • PVC (present value of costs);
  • NPV (PVB less PVC);
  • NPV/k (where k is the level of funds available) and
  • BCR (benefit cost ratio, PVB divided by PVC).

The accuracy of the outcome of a cost-benefit analysis is dependent on how accurately costs and benefits have been estimated.

Other Strategic Planning Frameworks

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