10 Questions explaining Cost Benefit Analysis in Project Management

A cost-benefit analysis (CBA) is a method for calculating the costs and benefits of various decisions in order to determine the most cost-effective option. CBAs are a versatile method for making business, project, and public policy decisions.

CBA has been in existence for quite some time. Benjamin Franklin wrote about it in 1772. However, the modern concept of CBA can be traced back to a French engineer named Jules Dupuit, who described the process in an article published in 1848.

The CBA process has progressed significantly since then. Let’s go over this checklist to see how cost-benefit analysis is done:

1. What Are the Goals and Objectives of the Project?

Make a business case for your project, detailing the goals and objectives.

2. What Are the Alternatives?

Before you can determine whether the project is appropriate, you must compare it to similar previous projects to determine the best course of action. You can quickly assess their performance metrics, such as return on investment, internal rate of return, payback period, and benefit-cost ratio.

3. Who Are the Stakeholders?

Make a list of all project stakeholders. They are the ones who bear the brunt of the costs and benefits. Identify which of them is in charge of making decisions.

4. How Will You Measure Costs and Benefits?

You must choose the metrics that will be used to assess all costs and benefits. Some of them will have a monetary value, while others will require additional information.

5. What Is the Outcome of Costs and Benefits?

Examine the project’s costs and benefits, assign a monetary value to them, and plot them over a relevant time period. It’s critical to realise that CBA calculates the monetary value of current and future costs and benefits.

6. What Is the Common Currency?

You can’t compare the current monetary value of costs and benefits to future rates, as mentioned in the previous step. As a result, you’ll need to figure out the time value of money, the discount rate, and the net present value of cash flows. However, the benefits of a project may not always be quantifiable in monetary terms. If you find yourself in this situation, conduct a cost-benefit analysis.

7. What Is the Discount Rate?

The discount rate is used to determine the present value of future cash flows entering and exiting your project.

8. What Is the Net Present Value of the Project?

The net present value of a project is a profit measurement determined by subtracting the present values of cash outflows from the present values of cash inflows over time.

9. What Is the Sensitivity Analysis?

A sensitivity analysis is a probability method used in business and management to determine how uncertainty affects your decisions, costs, and profits. Sensitivity analysis is used in project management CBAs to determine the benefit-cost ratio of possible scenarios. To perform sensitivity analyses, you can use Excel or more specialized software.

10. What Do You Do Once Your CBA Is Complete?

After gathering all of this information, the final step is to choose the option that the CBA recommends, which has the best benefit-to-cost ratio.

Need more insights on the same? Enroll in a PMP bootcamp online today!