Question

Outline at least 3 different methods of cost-benefit analysis. Explain what is intangible benefits, and what impact does it have on cost-benefit analysis.

Answer 1

Whenever an organization consider whether or not to pursue an investment in a project, the firm will take a cost benefit analysis to asses the value of the project and to also see whether or not they should progress with it. The major objective is to determine the the values of benefits and cost.

There are different methods to perform a cost-benefit analysis in an organization. The very first is a formal cost-benefit analysis which can be cosidered as a multi-step process consisting a initial survey, a thorough study on the viability and practicality of the project, and a final report that is submitted after assessment. At the end of every stage in the process, the committee who is performing the cost-benefit analysis has the right to decide whether or not to pursue the next step.

The initial survey is include collecting necessary data from both the ends i.e. the existing condition and future possibility. Then there is feasibility study which includes evaluating the collected data to predict the future productivity of the project. The final step includes a report with appropriate informations, remarks and actions that need to be taken for desired outcome.

Another typical method to evaluate the economic benefit of a project is Benefit Cost Ratio. In this method, the total ratio of a project profit and the overall cost is summarised. This is done by adding the discounted benefit for a project over its total life span divided by total discount of the project.

Net present value is another excessively used cost benefit method where the difference between total discounted benefit subtracted by the total discounted cost are considered crucial and provide the net value of the project. In short, a project with higher Net present value is choosen over a project with less or negative NPV.

Intangible benefits are also known as soft benefits are basically the benefits which do not have a physical presence or value like money or infrastructure but still are very important for the effectiveness and productivity of the company. For example motivation, morale and loyalty of the employeees towards the company plays a prime role in long term productivity and stability of the company.

In a cost-based analysis, intangible benefits are very hard to calculate but to identify them is equally important as the other steps for tangible benefits. These intangible benefits are most likely to make a big difference in project funding. For example, a group of highly skilled, motivated and efficient emplyoees can reduce the cost of hiring additional people for the same work and hence the cost of additional labours is subtracted from the overall cost.