Define: Cost/Benefit Analysis

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Definition: Cost/Benefit Analysis



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Full Definition of Cost/Benefit Analysis


Cost-benefit analysis is essentially a system of economic accounting, which owes its origin to a French engineer, Jules Dupuit. Noted economist Alfred Marshall also formulated some key concepts of CBA. It was, however, the Federal Navigation Act of 1936, which gave an impetus towards the development of practical models of CBA. It was not until the 1950s that economics fraternity came out with some rigorous theoretical work involving CBA models. CBA is still developing as an analytical tool, though its basic framework is well laid out.

Cost/benefit analysis is a process of quantifying the most economically feasible outcome by weighing potential costs against potential benefits. Cost/benefit analysis is a risk management technique. Implementing cost/benefit analysis may help recognize certain risks and rewards, and thus help determine the right course of action with respect to given business undertaking. Cost/benefit analysis is an examination that can be applied to virtually any business endeavour. Stock trades, real estate deals, and business projects may all require a thorough cost/benefit analysis. An example of cost/benefit analysis would be a decision concerning an investment in a volatile but bullish stock. Large corporations and governments also perform cost/benefit analysis to streamline macroeconomic decisions related to budgeting, capital goods, monetary policy, and capacity utilization. In a professional setting cost/benefit analysis is usually conducted by business analysts or financial advisers.

Cost-benefit analysis or CBA is essentially an economic assessment of proposed investment projects for determining their viability. In simple terms, CBA helps one to determine whether gains or benefits from an investment outweigh its costs or not. Costs are determined in terms of ‘opportunity costs’. Gains refer to a set of benefits (of various kinds) arising from concerned project (s). Both gains and costs are expressed in monetary units in CBA. CBA finds wide usage in the modern-day world. Starting from the government to corporate investment projects to inter-disciplinary fields like valuation studies in environmental economics, CBA s are used everywhere.

A project is accepted under CBA when the net present value of accruing benefits is positive.

CBA Steps

Some general steps for conducting cost-benefit analysis are listed below.

  • Breaking down of concerned plan into its elements. (Mostly accompanied by the creation of flowcharts on inputs, outputs and other activities)
  • Estimation of cost and benefit of each involved element. (Calculations may include direct, indirect, social and financial costs and benefits)
  • Comparison of summation of costs with the summation of benefits

Further for each (constituting) element weights can be assigned as per their level of importance.


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Definition Sources


Definitions for Cost/Benefit Analysis are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 26th March, 2020