This presentation is about cost-benefit analysis

This presentation is about cost-benefit analysis

1. What is it?
What use is it?
How do you do it?
Richard Harrison-Murray
Research consultant
[email protected]
Cost-Benefit Analysis

2. What exactly is CBA?
(Cost Benefit Analysis)
•An aid to making rational investment decisions
•Framework for evaluating investment ‘projects’
e.g. investment in new irrigation equipment
•Based on predictions of future cash flows
•Takes account of time value of money
•Requires all costs and benefits to be given a
monetary value

3. How do you go about it?
1.Quantify relevant costs and benefits, i.e. those
that depend on the decision to invest
2.Take account of tax (excl. VAT, incl. tax relief)
3.Predict cash flows over your planning horizon
4.Decide on the appropriate discount factor taking
account of
•cost of borrowing
•inflation
•risk
•return on alternative investment (e.g. stock market)

4. 5.Calculate indicators of investment quality
•Net Present Value (NPV) =
benefits – costs, all in “today’s money”
•Payback Period (PP)
= years till benefits exceed
costs
•Internal Rate of Return (IRR) =
annual % return on investment
6.Use these indicators to decide whether the
proposal is financially attractive.
7.Consider any non-monetary factors e.g.
legislative pressure, effect on staff morale, etc.
8.Decision time !

5. Key points about CBA
1.Examines the effect of a change; it needs
much less data than a complete economic
analysis
2.Running a large number of scenarios may lead
to useful generalisations but it is better for
individual nurseries to run a CBA for their own
situation and their own proposal
3.It depends on predicting the future so it is
sensible to test the effect of errors in those
predictions on expected returns
4.A software tool to do the donkey-work is very
useful

6. The water LINK CBA Tool
•MS Excel Spreadsheet
•Helps assemble the data and do the calculations
•Simple to use but flexible
•Help from extensive pop-up comments
•Formulae protected from accidental changes
•Advanced users can customise
•Colour indicates where input is required etc.
•“What if” exploration is easy and results can be
transferred to user-defined graph