Cost-Benefit Analysis

Cost-Effectiveness Analysis

Objective: to understand how CBA  and CEA could help in evaluating a program or project

Type of evaluations

•          . Goal-based evaluation

•          b. Process-based evaluation

•          c. Outcomes-based evaluation

•          Related to those type of evaluations:

•          Cost-Benefit Analysis CBA

•          Cost-effectiveness Analysis CEA

•          Financial Evaluation

Why CBA or CEA?

•          All programs aim to produce benefits that outweigh their costs.

•          Costs and benefits can be compared to determine the worthiness of a program.

•          Cost-benefit and cost-effectiveness analysis are the most common methods used to accomplish the comparison between costs and benefits.

•          Both analyses provide information about the net present value (NPV) of a program. NPV is an indicator of how much value an investment or project adds to the firm. The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. 

•          In CBA the benefits are transformed into monetary terms and compared to program costs.

•          In CEA benefits are transformed into non-monetary unit, such as lives saved, people attended, and are compared with program costs in dollars.

How do they work?

•          At the planning stage, CBA or CEA may be undertaken before the fact, based on estimates of anticipated cost and benefits.

•           They are tools analysis, particularly as ways to examine the net benefits of a proposed project or program involving large capital investments.

•          After a program has been in operation for some time, CBA and CEA may be used after the fact, to assess whether the actual costs of the program were justified by the actual benefits.

CBA

•          CBA is a quantitative analytical tool to aid decision-makers in the efficient allocation of resources.

•          CBA helps managers answer questions such as:

•          Does the proposal provide a net benefit to the community as a whole?

•          Should the proposed project, programme or policy be undertaken?

•          Should the project or programme be continued?

•          Which of various alternative projects or programmes should be undertaken?

•          The CBA could be done from three perspectives or points of view:

1. Individual’s perspective
2. government perspective
3. social perspective.

•          Definition of costs and benefits will usually differ from one perspective to the next.

The social perspective, for example accounts for all costs and benefits to society. However, the individual perspectives may help shed light on differing viewpoints about the worth of the program, or explain a program’s success or failure.

The individual’s perspective

•          It examines the program costs and benefits to the program participant: person, a family, a company or a non-profit organization.

•          CBA done from such a perspective often produce high benefit-cost ratios because the government or society subsidizes the program from which the participant benefits.

Government perspective

•          The analysis from a government perspective values costs and benefits from the point of view of the funding source.

•          It is basically a financial analysis, examining the financial costs and the direct financial benefits to the government.

•          Cash flows that would be examined: program administrative costs, direct cash outlays (expenditure), taxes paid, unemployment insurance, and others.