Sample Cost Benefit Analysis

Cost Benefit Analysis

Evaluating Quantitatively Whether to Follow a Course of Action

You may have been intensely creative in generating solutions to a problem, and rigorous in your selection of the

best one available. This solution may still not be worth implementing, as you may invest a lot of time and money in

Costs are either one-off, or may be ongoing. Benefits are most often received over time. We build this effect of

time into our analysis by calculating a payback period. This is the time it takes for the benefits of a change to repay

its costs. Many companies look for payback over a specified period of time – e.g. three years.

In its simple form, cost-benefit analysis is carried out using only financial costs and financial benefits. For example,

a simple cost/benefit analysis of a road scheme would measure the cost of building the road, and subtract this

from the economic benefit of improving transport links. It would not measure either the cost of environmental

damage or the benefit of quicker and easier travel to work.

A more sophisticated approach to cost/benefit measurement models is to try to put a financial value on intangible

sophisticated art. The fundamentals of this are explained in Principles of Corporate Finance by Richard Brealey and

Stewart Myers – this is something of an authority on the subject.

Example:

A sales director is deciding whether to implement a new computer-based contact management and sales

processing system. His department has only a few computers, and his salespeople are not computer literate. He is

aware that computerized sales forces are able to contact more customers and give a higher quality of reliability

and service to those customers. They are more able to meet commitments, and can work more efficiently with

fulfillment and delivery staff. His financial cost/benefit analysis is shown below:

1 server @ $3,500



3 printers @ $1,200 each



Cabling & Installation @ $4,600



Keyboard skills – 8 people @ $400 each