Cost Benefit Analysis Calculator

Historical Background

Cost-Benefit Analysis (CBA) originated in the early 19th century. One notable early application was in 1844 when Jules Dupuit, a French engineer and economist, analyzed the societal benefits of infrastructure projects. It became a formalized tool in the 20th century, particularly in U.S. federal project evaluations.

Formula

The formula for calculating a cost-benefit analysis is:

\[ \frac{\sum PV{\text{Benefits}}}{\sum PV{\text{Costs}}} \]

where:

• \(PV_{\text{Benefits}}\): Present value of all expected benefits
• \(PV_{\text{Costs}}\): Present value of all associated costs

Example Calculation

If the present value of all expected benefits is $150,000, and the present value of all associated costs is $100,000, then the cost-benefit analysis ratio is:

\[ \frac{150,000}{100,000} = 1.5 \]

A ratio greater than 1 indicates that the benefits outweigh the costs.

Common FAQs

What is a Cost-Benefit Analysis?
A cost-benefit analysis evaluates the potential financial ratio between the costs and benefits of a project or action to determine its overall value.

How are benefits and costs estimated?
They are typically measured in terms of their present value to reflect the current value of future cash flows using discount rates.

What is a good cost-benefit ratio?
A ratio above 1 indicates that the benefits are greater than the costs, which is desirable. However, the specific threshold can vary depending on the project's nature.

How do you decide what projects are worth the investment?
Decision-makers prioritize projects based on their impact and efficiency, using CBA to ensure resources are allocated to the most beneficial opportunities.