Cost-benefit analysis
Cost-benefit analysis compares the total expected costs of a decision against its total expected benefits, in euros, and supports acting only when the benefits exceed the costs.
What it is
See it move
An automated quality-control scanner costs €40,000 upfront plus €5,000 a year to maintain over three years, totalling €55,000. It is expected to cut returns by €25,000 a year for three years, totalling €75,000 of benefits. Subtracting the €55,000 of costs from the €75,000 of benefits leaves a €20,000 net benefit, so the analysis supports buying the scanner.
The formula
Variables
- Net benefit (€)
- Total benefits (€)
- Total costs (€)
The euro test for whether a decision is worth making: proceed only when net benefit is positive.
Check yourself
A firm is evaluating a new invoicing system. It costs €18,000 to set up, with no further running costs, and is expected to save €6,000 a year in staff time over its 4-year useful life. What is the net benefit of adopting the system, and should the firm proceed?