Cost benefit analysis
A cost benefit analysis is developed to find out the results of from the plan of production of any organization means how well or how poorly it will produce benefits. Any project is associated with two major benefits that have to be determined before starting a project. These benefits include private benefit and social benefits. Private benefit is the benefit of the company itself that a company can gain from the development of product. The other benefit is the benefit that social environment can get from the development process. These benefits may include the job opportunities, health and wealth from the product etc. Although the discussion zone can be wide up to many benefits but cost benefit analysis is limited to financial gains from the project (Bellonias, 2008).
The cost benefit analysis is also referred as “running the number” because of its nature of addition and subtraction of factors that have good or bad effects on project. Cost benefit analysis is made to consider the factors that have positive effects on the project and eliminate those factors that will emerge bad influence on the private or social interests. After quantifying the factors, the project is then considered as advisable or not on the basis of its difference of positive and negative factors. For the success of the project it is necessary to find out the factors of influence properly (about.com).
Cost benefit analysis is a simple technique that is used to decide whether a change can be brought or not through a project. The costs are either one off or ongoing and both of them are necessary to consider in the project. Cost benefit is limited to financial benefits. For example in a project of developing a road only the expenses that will be used to build the road and other financial gain that are obtained from the project are measured. The damages in the environment by the development of the project and the ease of travel to the public are not measured. The most appropriate approach to build a cost benefit analysis is to put economical value on the costs and benefits that are elusive (Puttaswamaiah, 2002).
Cost benefit analysis is a widely used tool to make decisions regarding adaptation of project. The first step in this analysis is to analyze the cost that is required by the change. The benefits are than calculated in the scope of finance. Where time is a factor of benefit than it is necessary to estimate the time in which benefits are received that can overcome the cost or expenses of the project. It is carried out only by the analysis of financial costs and benefits. The intangible costs are decided to include on the basis of its possibility of conversion into valuable assets. This estimation of value produces subjectivity in the project. Formal capital budgeting is used in the large projects in which financial decisions are evolved by taking many complexities into account. Capital budgeting is wider in scope and it is more complex. However cost benefit analysis is a powerful tool by which success of any project can be estimated (mind tools).
Bellonias Dipl.-Wirtsch.-Ing. Loukas. (2008). Cost Benefit Analysis in Environmental Friendly Marketing. Grin verlag.
Puttaswamaiah K. (2002). Cost-benefit analysis: environmental and ecological perspectives. Transaction publishers.
Cost benefits analysis. About.com: management, Retrieved at 7 Sep 2010 from http://management.about.com/cs/money/a/CostBenefit.htm.
Cost/benefit analysis. Mind tools, retrieved at 7 Sep 2010 from http://www.mindtools.com/pages/article/newTED_08.htm.