Cost-benefit analysis (CBA) is the weighing-scale approach for decision-making.
All the positive elements (cash-flows and other intangible benefits) are put on one side of the balance and all the negative elements (the costs and disadvantages) are put on the other. Whichever weighs the heavier wins.
Example of a Cost-Benefit Analysis
A company that would like to buy software to improve its business might use a CBA to make up its mind.
On the minus (cost) side would be:
However on the plus (benefits) side would be:
Common mistakes and problems with Cost-Benefit Analysis
History of Cost Benefit Analysis
The idea of this methodology originated with Jules Dupuit, a French engineer whose 1848 article is still worth reading. The British economist, Alfred Marshall, conceived some of the formal concepts that are at the foundation of CBA. But the practical development of CBA came as a result of the impetus provided by the Federal Navigation Act of 1936. This act required that the U.S. Corps of Engineers carry out projects for the improvement of the waterway system when the total benefits of a project exceed the costs of that project. Thus, the Corps of Engineers had created systematic methods for measuring such benefits and costs. The engineers of the Corps did this without much assistance from the economics profession. It wasn't until about twenty years later in the 1950s that economists tried to provide a rigorous, consistent set of methods for measuring benefits and costs and deciding whether a project is worthwhile.