Posted in Finance, Accounting and Economics Terms, Total Reads: 1697
Definition: Cost Benefit Analysis
In order to evaluate any project, a cost-benefit analysis is done. The total expected income is summed up and then compared with the total expenditure incurred and to be incurred. The expected revenue is converted into equivalent monetary amount and then compared with the costs to see if the investment/project is worthwhile.
The CBA was formalized in the USA under Federal Navigation Act of 1936 which mandated the engineers to execute projects for the improvement of the waterway system whenever the total benefits of the project exceeded the costs. The formal concepts of CBA were actually propagated by an economist, Alfred Marshall.
CBA has two purposes:
To verify the soundness of the investment to be made (or) the decision to be taken.
To provide a basis for comparing projects. I.e. it weighs the benefits and the cost in equivalent units such that there is a meaningful and objective comparison.