Cost Benefit Analysis:

• Cost Benefit analysis (CBA) is a process for evaluating the merits of a particular project in a systematic way in terms of cost and benefits of the project.
• Cost is the value of money that has been used up to produce something, and hence is not available for use anymore.
• Benefits are the monetary values of desirable consequence of economic polices and decisions The conceptual and theoretical framework of CBA is derived from welfare economics
• Cost Benefit Analysis (CBA) is an economic evaluation technique that measures all the positive (beneficial) and negative (costly) consequences of an intervention or program in monetary terms.
• The valuation of all program outcomes in monetary units allows decision makers to directly compare the outcomes of different types of interventions.

• Principles of Cost Benefit Analysis

  • There must be a common unit of measurement
  • CBA valuations should represents Producers or Consumers
  • Benefits are usually measured by Market Choices
  • Gross benefits of an increase in consumption is an area under the demand curve
  • Some measurement of benefits require the valuation of human life
  • The analysis of the project involves with versus without comparison
  • CBA involves a particular study area
  • Double counting of benefits or cost must be avoided
  • Decision criteria of projects

• When new systems are proposed, the cost is a major consideration which impacts on the decision to accept or reject the proposed system.

• The people funding the system want to know whether they will get a good return for the money they invest in the system. In large companies there is often competition to get access to financial resources for innovative projects. So, to win support for a project, estimates of costs and benefits must be calculated. This is called a cost-benefit analysis.
• There are two main areas for costs: the development costs and the operating costs once a system is introduced.
• There are tangible and intangible costs and tangible and intangible benefits. Tangibles can be easily calculated; intangibles cannot.

1. Tangible costs

   Tangible costs include the following. a. Personnel Costs

   • salaries of analysts, programmers, consultants, data entry personnel , etc

   • costs for trainers and employees' time

     b. Costs for equipment for the new system\

   • computer hardware
   • space/rooms

   • furniture

     c. Supporting material

   • stationery

   • photocopying

     d. Converting to new system

   • designing new processes and procedures

   • running new and old systems together for a period of time

     e. Miscellaneous

   • travel
   • overheads
   • telephone

2. Intangible costs

   Intangible costs include

   • loss of customer good will
   • staff distress
   • supplier confusion when processes change

• Intangible benefits:

  Although the costs of intangible benefits cannot be easily calculated, it is very important to identify them. Often intangible benefits may make the difference between a project being funded or not being funded.

  Some intangible benefits are

  • improved work practices and employee morale
  • customer access to account details over the telephone
  • up to date product information on the web
  • increased loyalty of customers by offering competitions and prizes

• To determine whether a proposed system is cost-effective three techniques are often used. These involve formulas to calculate the time value of money. This is based on the assumption that a dollar today is worth more than a dollar next year, because if you invest a dollar today you would have more that a dollar next year.

  The three techniques are

• payback analysis
• return-on-investment analysis
• net present values