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WEEKLY INSPIRATION
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Lecture # 8
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Inventers of CBA
• A French economist and engineer Jules Dupuit introduced the concept
of CBA in his article in 1848. After this date, a famous economist Alfred
Marshall formalized this approach.
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Introduction to CBA
• Cost Benefit Analysis is a
mathematical approach to compare
the costs and expected benefits of
two or more projects (or options) in
order to arrive at ‘Decision Making’
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What it is?
• The purpose of applying Cost Benefit
analysis is to calculate the ratio of
benefit over costs. It is a simple
technique that can be used when
making financial decisions
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Every Business Decision Making Requires CBA
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CBA Importance for Managers
• Manager
(HR/Sales/Marketing/Finance etc.) is
required to give a presentation on why
they require additional personnel or
machine or need to take a marketing
trip abroad or open up Dubai office of
travel agency before board of directors
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CBA Serves Two Purposes for Managers:
• To verify that an investment’s (or a project’s)
benefits are more than it’s costs
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What is the common unit in CBA?
• In order to make a comparison
between the positive and
negative aspects of the
alternatives, a common unit is
required. Money is the common
unit used for comparison of
alternatives. In
a CBA calculation, costs and
benefits are represented
as monetary values
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Simple Cost Benefit Example
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All the project parameters are summarized in below table:
(Step #1)
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Cost & Benefit Calculations (Step # 2)
Project cost calculations are summarized in Project benefit calculations are summarized in
below table. below table.
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Costs and Benefits Comparison (Step # 3)
• It is obvious that Project 2 is more profitable than Project 1. Although the benefits of Project 1
is more than Project 2, the costs of Project 2 is less than the costs of Project 1.The company
will earn more profit by spending less money
• Now we also do cost benefit ratio R= B/C to find out which project has more positive net
value
*Project 1 63000000/61900000=1.01
*Project 2 54625000/44500000=1.22
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Summary
• This simple example shows how to make a cost benefit analysis for two
projects for managerial decision making
• CBA can also be done for a single project but in order to make it authentic
some sort of comparison with a similar or same project would go a long way
in convincing senior management to release funds
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References
• ProjectCubicle (February 13, 2018). Cost benefit analysis example. Retrieved
from https://www.projectcubicle.com/cost-benefit-analysis-example/
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Class Activity on CBA
• Group of 3 students without spokesperson
• You are required to make a CBA of an upcoming project for your company
plus give out CBR
• You have 30 minutes. You can assume any monetary value as long as the
CBA is simplified for your audience and teacher
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• Your MNC has decided to expand: (In Pak Rupees)
•#1 They have seen a huge new place at Sharah Faisal near Lal masjid costing ______
•#2 They have also seen a huge place in Model Colony costing_____________
•#3 They need to hire 100 resources for each project: Project A______Project B_______
•#4 Hidden costs associated with each project: Project A________ Project B_________
•#5 Time of completion for each project: Project A:__________ Project B: _______________
•#6 The total cost for each project: Project A__________ Project B:_____________
•#7 The total benefit for each project: Project A_________Project B: ________________
•* Mention 3 intangible factor that comes to your mind which may create hurdle in completion
of project
•**At the end determine which project is more feasible by calculating it though the formula of
CBRatio taught in class
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