After Reviewing Cost-Benefit Analysis and Cost-Effectiveness Analysis, Discuss the Steps

Question

Examlex · Accepted Answer

The Answer is Both CBA and CEA require significant amounts of data. Therefore, it is essential that organizations work in partnerships with selected community agencies and evaluators to develop the capacity to collect data relating to all cost and benefits of a proposed program or purchase. With this understanding in mind, one can utilize the steps below to conduct a cost analysis:
Define the analysis: The first step in any cost analysis is to define it. The audience, or the group of people who will use the results, can range considerably on any given cost analysis. Therefore, one must take careful consideration as to how the information is communicated to the various groups. In addition to communicating information to a broad audience, you must also be able to communicate the parameters of your cost analysis so the audience understands its limitations. Cost analyses require a number of estimates and assumptions to determine the net benefits (CBA) or cost-effectiveness ratio (CEA). These estimates and assumptions will significantly impact the results, which can inadvertently change the final decision and recommendation provided. In doing this, one must allow partners to decide what type of analysis to do, determine who has standing in the analysis, specify the alternatives or basis for comparison, decide the time frame for analysis and specify why it is appropriate, and determine a discount rate.
List and monetize impacts (CBA) or quantify benefits by unit of effectiveness (CEA): Now you need to generate a list of costs and benefits from each perspective identified in Step 1. In Step 2, you need to include all categories of costs and benefits. Then, once you have a list of the costs and benefits, you must monetize each impact (CBA) or quantify benefits by units of effectiveness (CEA). Note that the costs for CBA and CEA are the same, only the benefits are different. Finally, the partners will need to justify how they monetized the intangible cost or benefit.
Discount future net benefits to determine present value: When determining present value, your analysis will include only the costs and benefits that exceed the status quo because the organization will incur certain costs and benefits even if it does not move forward with the proposed program or purchase. The total cost for the program or purchase is the difference between the full cost of the program and its current costs, and the total benefits for the program or purchase is the difference between the full benefits and its current benefits. Once you know the total cost and benefits, you can calculate the present value of net benefits.
Calculate net present value (CBA) or cost-effectiveness ratio (CEA): Now that the value of costs and benefits are in the present value, you can calculate the net present value (NPV) by summing the present value for each year of data. To calculate the cost-effectiveness ratio, we need to compute the present value of total costs, which is divided by the unit of effectiveness.
Perform sensitivity analysis: Recall that the results of CBA and CEA are sensitive to the estimates and assumptions made at the beginning of the analysis. Before moving forward with a capital purchase or implementing a new program, you need to test whether your decision would change if the estimates used in the initial analysis differed meaningfully from reality. That is, in Step 5, it is particularly important to assess whether your decision would still be the same if conditions were worse than originally expected.
Make a decision and provide recommendation: If the benefits outweigh the costs of a project, you generally recommend the project move forward because the benefit to those with standing in the analysis will benefit from the project or purchase. That is, if the NPV is positive, you recommend moving forward; but, if the NPV is negative with the costs outweighing the benefits, you would not recommend the project move forward. If the initial NPV is positive but changes to negative during sensitivity analysis, you know the project is sensitive to the estimates used in the analysis, and you must caution decision makers about the conditions in which costs would outweigh benefits.

After Reviewing Cost-Benefit Analysis and Cost-Effectiveness Analysis, Discuss the Steps

Essay

Correct Answer:
Verified

After Reviewing Cost-Benefit Analysis and Cost-Effectiveness Analysis, Discuss the Steps

Essay

Correct Answer:VerifiedShow Answer

Correct Answer:
Verified