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Benefit-Cost Analysis

Benefit-Cost Analysis. A Primer. Why Benefit-Cost Analysis?. Resource-allocation involves choices Many times alternatives exist beyond simple “do it”, “don’t do it” dichotomy Essential challenge of resource-allocation is how to do the most good given the choices available.

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Benefit-Cost Analysis

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  1. Benefit-Cost Analysis A Primer

  2. Why Benefit-Cost Analysis? • Resource-allocation involves choices • Many times alternatives exist beyond simple “do it”, “don’t do it” dichotomy • Essential challenge of resource-allocation is how to do the most good given the choices available

  3. Benefit-Cost Analysis Steps • Examine needs, consider constraints, and formulate objectives and targets. • Define options in a way that enables the analyst to compare them fairly. • Analyze incremental effects and gather data about costs and benefits. • Express the cost and benefit data in a valid standard unit of measurement (for example, convert nominal dollars to constant dollars, and use accurate, undistorted prices). • Run the deterministic model (using single-value costs and benefits as though the values were certain). Find deterministic estimate of net present value (NPV).

  4. Benefit-Cost Analysis Steps 6. Conduct a sensitivity analysis to determine which variables appear to have the most influence on the NPV. 7. Analyze risk by using what is known about the ranges and probabilities of the costs and benefits values and by simulating expected outcomes of the investment. 8. Identify the option, which gives the desirable distribution of income (by income class, gender or region - whatever categorization is appropriate). 9. Considering all of the quantitative analysis, as well as the qualitative analysis of factors that cannot be expressed in dollars, make a reasoned recommendation.

  5. Components of Benefit-Cost Analysis • parameters table; • incremental-effects model • table of costs and benefits over time • table of possible investment results and a statistical and graphical analysis of NPV and investment risk.

  6. Step 2: Defining Options Why is it hard? • ensure that all the relevant alternatives are considered. • the alternatives to be compared must each be defined in a consistent and fair way. How to construct fair options 1. Standardize the options for timing 2. Standardize the options for scale

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