Cost Benefit Analysis Model

Posted on May 15 2009

The Cost Benefit Analysis Modelis a scaled approach for decision making in which the decision maker weighs the costs vs. benefits.

It is comparative to a balance sheet in which the positives are on one side of the “T” and the negatives on the other. The concept is that one side will appear “heavier” to the eye, and the decision will be obvious. A variant of this approach is the PMI , or Plus-Minus-Interesting Points tool.

This approach is typically used with pure numerical costs and benefits, so that the results can be purely objective and numerical. We have seen it work well as an “optic” in visually picking out.

Disadvantages

–Mixing tangible and intangible benefits. Costs are typically tangible, hard and financial, while the benefits are hard and tangible, but also soft and intangible. –Intangible benefits may clearly outweight financial benefits

–Risk must be included, or cannot be – watch for it!

–Magnitude of the items on the list. A big list of small, detailed items may LOOK like it outweighs one or two large items on the other side of the balance sheet

When to Use Cost Benefit Analysis

–To analyze two or three alternatives that are “either/or” decisions

–To analyze financial implications

–To analyze two dimensional choices

An Example of Cost Benefit Analysis

A company that would like to buy new software to improve its business might use a Cost Benefit Analysis, or PMI to decide. On the minus (cost) side listed are: — the price of the software

— the cost of install and implementation of the software

— the cost of training for the users of the software.

On the plus (benefits) side would be: — Improved business processes (leading to an annual cost decrease),

— Better knowledge/information – the company can make better decisions

— Potential additional cash-flow due to better management

— increased staff moral, due to removal of an archaic system

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