Cost-Benefit Analysis

Posted on May 7, 2009 by

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A Cost-Benefit Analysis is a comparison between the costs of an activity and its benefits. This is a broad concept that can be applied across many situations. In general, if the benefits outweigh the costs, the activity is worth pursuing. It can also be used as a means of comparing multiple potential projects to discover which would be the most valuable to initiate. For this reason, it may be included in a project’s Business Case, which is the document that justifies the project.

Cost-Benefit Analysis is specifically listed as a tool and technique of the fourth edition PMBOK®s Plan Quality process. In this case, the costs of a potential quality activity, such as a one-day training seminar, are compared to the benefits, such as higher quality products due to less human error. Essentially, it is part of a Business Case for each proposed quality activity that may be planned.

If the benefits and costs are measured strictly in financial terms, the Benefit-to-Cost Ratio may be examined. This is simply dividing the benefits by the costs. For example, if project Alpha is expected to bring in $100 and it will cost $50, then the Benefit-to-Cost Ratio is 100/50, which is 2.0. If project Beta is expected to bring in $75 and it will also cost $50, then the Benefit-to-Cost Ratio is 75/50, which is 1.5. Because project Alpha has a higher ratio, on financial considerations alone, it should be preferred over project Beta.