Cost-benefit analysis in Project Management

More complex approaches to cost-benefit analysis attempt to determine a financial value for all of the identified intangible costs and benefits. The process of determining a financial value for intangible costs and benefits is a highly subjective procedure and one for which there is no definitive or easy answer.

For example, the land value as calculated by the local council for the parkland might be $500,000 but its environmental value because of the native trees and wildlife might make it worth more than this figure.

Further to this, what value can be placed upon having parklands which the community uses for a variety of purposes?

Regardless of values placed upon such matters these are questions that those involved in the process have to answer and once answered have to be defended and the basis for such conclusions explained.

What are the benefits of a Cost-benefit analysis for Project Managers

A cost-benefit analysis finds, quantifies, and adds all the positive factors. These are the benefits. Then it identifies, quantifies, and subtracts all the negatives, the costs. The difference between the two indicates whether the planned action is advisable. Therefore to undertake a cost–benefit analysis it is necessary to list all the monetary costs that will be incurred in the implementation and during the life of the project. These costs would include, for example, consultancy fees, software licenses and training expenses.

A list of all non-monetary costs that are likely to be involved needs to be prepared. This list would include time lost by staff involved in the project, imperfect processes because of new practices, potential risks, and potential risks to morale.

Monetary values to the costs identified in steps one and two need to be assigned and to ensure accuracy the monetary values should be stated in present value terms.

If realistic cost values cannot be readily evaluated, consult with market trends and industry surveys for comparable implementation costs in similar businesses.

Add all anticipated costs together to get a total costs value.

Calculations are based upon present value because the benefits of the new system would not be felt until after its introduction. The question to be answered is whether next year’s benefits outweigh this year’s costs.

In cost–benefit analysis this kind of question is answered by using a concept known as discounting. Discounting is a technique that converts all of the benefits and all of the costs into their value calculated to be as of now; that is, in the present. The concept of discounting is the opposite of that of compounding interest.

The logic for discounting is based on the premise that a dollar held or received today is worth more than a dollar that is received in the future. This is because by investing a dollar today in a safe investment, its value will increase to more than a dollar in the tomorrow. Learn more about becoming a project manager by undertaking a Project managment course on by clicking here for info

In other words a dollar received in the future is not worth as much as that same dollar received in the present. How much the future value of the dollar is discounted depends on the interest rate that can currently be received. If the interest rate is 10% it is easy to calculate that in one year’s time the dollar that has been invested will be worth $1.10.

Therefore, whenever the benefits and costs used in a benefit–cost analysis occur in the future, it is important to discount these future values to account for their present value.