Question

There are different approaches used to evaluate costs in benefit-cost analysis—the survey approach, the engineering approach, and the combined approach, which is a combination of the previous approaches. Illustrate the three, highlighting the problems they present and how the combined approach can prevent them.

Answer 1

Cost–benefit analysis (CBA) is primarily used in business and public policy decisions. Net present value (NPV) is the common basis to evaluate all flows of benefits and costs over time. The purpose of CBA is to determine whether the benefits of a given policy outweigh its costs relative to other available options. CBA is used to compare completed or potential courses of activities and estimate the value against the cost of a decision, project, or policy. It can help informing policymakers and the wider public about the pros and cons of alternative policy options.

CBA is a method for assessing the economic efficiency of proposed public policies through the systematic prediction and valuation (i.e., monetization) of social costs and social benefits. While individual decisions focus on benefits and costs to the individual, CBA considers the benefits accruing to and the costs incurred by all members of society – hence the terms social benefits and social costs.

One must ultimately place a value on human life in order to fully monetize the programme benefits. As an example, the cost-benefit analyses of the outcomes of a nutrition education programmes would express in monetary terms as follows: i.e. focus on the difference between money expended on the nutrition education programme and the money savings from reduced expenditure for treating dietary-related diseases such as anemia, goitre, vitamin A related blindness, etc.

The Survey Approach

The dataset from a survey provides information on the scope and objectives of CBA. The information is used to support information exchange and policy dialogue across budgetary authorities with investment roles. The content of the database is collected using an online questionnaire. Written questionnaires were complemented by phone interviews to deepen some of the most significant aspects

The benefit cost analysis process estimates the benefits and costs of an investment for two reasons:

1. To determine the viability of the project

2. To compare one project investment with other competing projects, to determine

feasiblity

It allows decision makers to appraise projects in a consistent and comparable manner.

Conducting a CBA can be an expensive and cumbersome undertaking, depending on the range of input data used to determine a project’s costs and benefits. Hence, these are recommended for use in projects where the potential costs of the project(s) are significant enough to justify the allocation of resources to forecast, measure and evaluate anticipated benefits, costs and impacts.

Project managers conduct the cost-benefit analysis by gathering data on the value of the benefits and the cost of the project.

Engineering Method

The data, time and expertise required to conduct a rigorous cost benefit analysis makes the effort seem daunting to the average engineer with little to no financial analysis training. The reality is that with a cursory understanding of the asset

operation, maintenance and logistic issues, a useful cost benefit analysis can be conducted by engineers without business school training.

An approach for conducting a cost benefit analysis of aircraft engine prognostics and health management.

Public decisions on questions related to industrial safety must take multiple, partially conflicting criteria into account:

• protection of human lives and health
• environmental considerations
• economic aspects: profits, jobs
• societal demand for greater transparency

Different people put different weights on these criteria, which are not expressed in the same units. Decision-makers need tools to help them establish tradeoffs between these considerations and to explain decisions to stakeholders and citizens.

A combination of the two methodologies would be an ideal one. Social costs and all opportunity costs can ideally be assessed by the Survey approach. But engineers are more competent to estimate all tangible or explicit costs. Hence both these two groups of people should join hands together so as to prepare an useful Benefit-cost analysis   

Cost–benefit analysis (CBA) is primarily used in business and public policy decisions. Net present value (NPV) is the common basis to evaluate all flows of benefits and costs over time. The purpose of CBA is to determine whether the benefits of a given policy outweigh its costs relative to other available options. CBA is used to compare completed or potential courses of activities and estimate the value against the cost of a decision, project, or policy. It can help informing policymakers and the wider public about the pros and cons of alternative policy options.

CBA is a method for assessing the economic efficiency of proposed public policies through the systematic prediction and valuation (i.e., monetization) of social costs and social benefits. While individual decisions focus on benefits and costs to the individual, CBA considers the benefits accruing to and the costs incurred by all members of society – hence the terms social benefits and social costs.

One must ultimately place a value on human life in order to fully monetize the programme benefits. As an example, the cost-benefit analyses of the outcomes of a nutrition education programmes would express in monetary terms as follows: i.e. focus on the difference between money expended on the nutrition education programme and the money savings from reduced expenditure for treating dietary-related diseases such as anemia, goitre, vitamin A related blindness, etc.

The Survey Approach

The dataset from a survey provides information on the scope and objectives of CBA. The information is used to support information exchange and policy dialogue across budgetary authorities with investment roles.

The content of the database is collected using an online questionnaire. Written questionnaires were complemented by phone interviews to deepen some of the most significant aspects

The cost benefit analysis process estimates the benefits and costs of an investment for two reasons:

1. To determine the viability of the project

2. To compare one project investment with other competing projects, to determine

feasiblity

It allows decision makers to appraise projects in a consistent and comparable manner.

Conducting a CBA can be an expensive and cumbersome undertaking, depending on the range of input data used to determine a project’s costs and benefits. Hence, these are recommended for use in projects where the potential costs of the project(s) are significant enough to justify the allocation of resources to forecast, measure and evaluate anticipated benefits, costs and impacts.

Project managers conduct the cost-benefit analysis by gathering data on the value of the benefits and the cost of the project.

Engineering Method

The data, time and expertise required to conduct a rigorous cost benefit analysis makes the effort seem daunting to the average engineer with little to no financial analysis training. The reality is that with a cursory understanding of the asset

operation, maintenance and logistic issues, a useful cost benefit analysis can be conducted by engineers without business school training.

An approach for conducting a cost benefit analysis of aircraft engine prognostics and health management.

Public decisions on questions related to industrial safety must take multiple, partially conflicting criteria into account:

• protection of human lives and health
• environmental considerations
• economic aspects: profits, jobs
• societal demand for greater transparency

Different people put different weights on these criteria, which are not expressed in the same units. Decision-makers need tools to help them establish tradeoffs between these considerations and to explain decisions to stakeholders and citizens.

A combination of the two methodologies would be an ideal one. Social costs and all opportunity costs can ideally be assessed by the Survey approach. But engineers are more competent to estimate all tangible or explicit costs. Hence both these two groups of people should join hands together so as to prepare an useful Benefit-cost analysis