Cost / Benefit analysis
What is Cost / Benefit Analysis?
Cost benefit analysis is a special financial technique, i.e. a computational process of result of investing in some entrepreneurial or infrastructural venture. On the one hand, all the revenues and benefits of the venture are calculated, and on the other hand all the costs and losses of the venture are calculated.
All revenues and benefits, costs and losses must be quantified and reduced to an equally measurable (monetary) unit. If the ratio of income and benefits to cost and loss, i.e. the coefficient is greater than one, i.e. if revenue and benefits outweigh the costs and losses, it is a financially profitable venture.
When is the Cost / Benefit analysis applied?
Cost benefit analysis is more commonly used when assessing the effects of public infrastructure projects / roads, schools, hospitals, garbage dumpsites, environmental protection, etc., i.e. the risk is higher.
What is assessed with Cost / Benefit analysis?
In public infrastructure projects, profits are not in the first place, as opposed to in entrepreneurial projects. Costs and losses resulting from investments in some entrepreneurial or infrastructure ventures are one-off and certain, while revenues and benefits are long-term and uncertain.
All this complicates the process of cost-benefit analysis, especially when we only deal with the benefits that are indirect and which contribute to the effects of users of e.g. roads, water supply facilities etc. For example, it is easy to determine the costs and losses of building a car road, but it is not easy to determine the economic benefits for numerous users of that highways resulting from improved traffic connections. And it is even impossible and unnecessary to quantify the costs and losses that arise from the devastation of the highway environment or the revenue and benefits that result from faster and simpler transportation.
In any case, the bigger the investment, the more complicated cost / benefit analysis is, because of the greater number of variables, greater duration of economic activity, and uncertainty, i.e. risk is bigger.