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Cost-Benefit Analysis

A financial technique that compares a project's expected benefits with its total costs to decide if the effort is economically worthwhile.

Key Points

  • Expresses projected benefits and costs in monetary terms to enable a like-for-like comparison.
  • Includes direct and indirect effects, as well as one-time and ongoing costs and benefits.
  • Often uses discounted cash flows and metrics such as NPV, benefit-cost ratio, ROI, and payback period.
  • Supports go/no-go decisions, project selection, and option prioritization; document assumptions and perform sensitivity analysis.

Example

A company considers implementing automation software. The project costs $450,000 upfront plus $60,000 per year to operate. Expected benefits are labor savings and error reduction worth $220,000 per year for five years. The PM calculates discounted cash flows at the firm's 8% rate, finds a benefit-cost ratio above 1 and a positive NPV, and recommends proceeding.

PMP Example Question

During project selection, the sponsor requests an analysis that converts all expected costs and benefits into monetary values and discounts future cash flows to present value. Which technique should the project manager use?

  1. Earned Value Management
  2. Cost-Benefit Analysis
  3. Parametric Estimating
  4. Decision Tree Analysis

Correct Answer: B — Cost-Benefit Analysis

Explanation: Cost-benefit analysis compares the monetary value of benefits to the total costs, typically using discounted cash flows, to assess economic viability.

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