Cost-Benefit Analysis (CBA) is a financial analysis method used to compare the benefits of a project against its costs. It helps organizations determine whether an investment is financially viable and supports informed decision-making.
Key Aspects of Cost-Benefit Analysis
- Compares Costs & Benefits – Evaluates whether expected returns outweigh project expenses.
- Supports Decision-Making – Helps determine whether to proceed, modify, or cancel a project.
- Uses Quantitative & Qualitative Measures – Includes both financial and non-financial factors.
- Calculates Return on Investment (ROI) – Assesses project profitability.
Cost-Benefit Analysis Formula
or
- If BCR > 1 → Project is financially beneficial.
- If BCR < 1 → Project costs outweigh the benefits.
Example Scenarios
Software Development
A company conducts a Cost-Benefit Analysis before developing a new mobile app, estimating development costs at $500,000 and projected revenue of $1.5 million.
Construction Project
A city evaluates whether building a new highway is justified by reducing commute times and increasing economic activity.
Business Expansion
A retail chain analyzes the costs of opening a new store versus the expected increase in sales and market share.
Why Cost-Benefit Analysis Matters
- Justifies Investments – Ensures financial and strategic alignment.
- Reduces Financial Risk – Prevents costly decisions with low return potential.
- Enhances Resource Allocation – Directs funds toward high-value projects.
- Improves Stakeholder Confidence – Provides data-driven financial insights.
See also: Return on Investment (ROI), Economic Feasibility Study, Project Justification, Risk Assessment.