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Cost Benefit Analysis
Decision making is about choices
For an individual
They might rely on intuition, a “gut feel” for the right choice. They decide
to do an analysis of the choices or it may be a combination of both of
these.
For a company
Being concerned with the profit earning capacity and income flow, they
may undertake a cash flow analysis or a full financial appraisal of the
project.
For the Government
Decision making for governments is much harder. Not only are they
expected to consider the profitability (or at least neutrality) of the
costing but must also include consideration of the social cost and
benefits of their choices. They are also expected to act within the
political environment to satisfy the political agenda set by the
government of the day and finally, must also comply with
environmental considerations.
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Cost – Benefit Analysis
Other issues
Is the project worthwhile financially?
Is it the best option?
Should it be undertaken at all?
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Process of Cost – Benefit Analysis : -
CBA is a process that presents a picture of various costs &
benefits associated with an information system.
CBA as a process consists of 3 basic activities viz.
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Cost - Benefit Analysis
Method
Identify all possible alternatives.
Prepare table showing life of the project i.e. year to year
basis.
Establish Cost of project during the year including capital,
operating and maintenance costs, social and other tangible
costs
Establish total benefits to be obtained from project by way of
sales of goods and services including value of social benefits.
Cost calculated at rate of interest such that NPV = Zero
Ranking in order of [ benefit – cost ] or [ benefit / cost ]
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Cost - Benefit Analysis
CBA unlikely to be a useful
technique unless two main
conditions are met :
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CBA via Portfolio Analysis for Information System
Project Risk
High Low
High
Low
CBA via Profitability Index for Information System
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Time Problems
Tackling future time problems by discounting future
costs and benefits.
Or calculating the correct rate for future rupees
value as well as accounting for additional benefits and
costs associated.
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