- Budget Considerations (to be submitted in a Word document with spreadsheets):
- What things should be considered in conducting a cost-benefit analysis on each project?
- At this point in your decision making which request is most appropriate? Request for Information, Request for Proposal or Request for a Quote? Explain your answer. Develop a request for proposal to send to the transcription and coding services.
- If the hospital can only approve one of the proposed projects, which do you think has the best chance of being approved? Why?
- If you were the director of the HIM department, how would you justify your department’s project so that it is presented most favorably? What are the benefits to selecting this project?
- Cost Benefit Analysis InformationCost-Benefit Analysis
Deciding, Quantitatively, Whether to go Ahead
(Also known as CBA and Benefit-Cost Analysis)
Imagine that you’ve recently taken on a new project, and your people are struggling to keep up with the increased workload.
You are therefore considering whether to hire a new team member. Clearly, the benefits of hiring a new person need to significantly outweigh the associated costs.
This is where Cost-Benefit Analysis is useful.
Cost-Benefit Analysis is a quick and simple technique that you can use for non-critical financial decisions. Where decisions are mission-critical or large sums of money are involved, other approaches – such as use of Net Present Values and Internal Rates of Return – are often more appropriate.
About the Tool
Jules Dupuit, a French engineer, first introduced the concept of Cost-Benefit Analysis in the 1930s. It became popular in the 1950s as a simple way of weighing up project costs and benefits, to determine whether to go ahead with a project.
As its name suggests, Cost-Benefit Analysis involves adding up the benefits of a course of action, and then comparing these with the costs associated with it.
The results of the analysis are often expressed as a payback period – this is the time it takes for benefits to repay costs. Many people who use it look for payback in less than a specific period – for example, three years.
You can use the technique in a wide variety of situations. For example, when you are:
- Deciding whether to hire new team members.
- Evaluating a new project or change initiative.
- Determining the feasibility of a capital purchase.
- However, bear in mind that it is best for making quick and simple financial decisions. More robust approaches are commonly used for more complex, business-critical or high cost decisions.
How to Use the Tool
Follow these steps to do a Cost-Benefit Analysis.
Step One: Brainstorm Costs and Benefits
First, take time to brainstorm all of the costs associated with the project, and make a list of these. Then, do the same for all of the benefits of the project. Can you think of any unexpected costs? And are there benefits that you may not initially have anticipated?
When you come up with the costs and benefits, think about the lifetime of the project. What are the costs and benefits likely to be over time?
Step Two: Assign a Monetary Value to the Costs
Costs include the costs of physical resources needed, as well as the cost of the human effort involved in all phases of a project. Costs are often relatively easy to estimate (compared with revenues).
It’s important that you think about as many related costs as you can. For example, what will any training cost? Will there be a decrease in productivity while people are learning a new system or technology, and how much will this cost?
Remember to think about costs that will continue to be incurred once the project is finished. For example, consider whether you will need additional staff, if your team will need ongoing training, or if you’ll have increased overheads.
Step Three: Assign a Monetary Value to the Benefits
This step is less straightforward than step two! Firstly, it’s often very difficult to predict revenues accurately, especially for new products. Secondly, along with the financial benefits that you anticipate, there are often intangible, or soft, benefits that are important outcomes of the project.
For instance, what is the impact on the environment, employee satisfaction, or health and safety? What is the monetary value of that impact?
As an example, is preserving an ancient monument worth $500,000, or is it worth $5,000,000 because of its historical importance? Or, what is the value of stress-free travel to work in the morning? Here, it’s important to consult with other stakeholders and decide how you’ll value these intangible items.
Step Four: Compare Costs and Benefits
Finally, compare the value of your costs to the value of your benefits, and use this analysis to decide your course of action.
To do this, calculate your total costs and your total benefits, and compare the two values to determine whether your benefits outweigh your costs. At this stage it’s important to consider the payback time, to find out how long it will take for you to reach the break even point – the point in time at which the benefits have just repaid the costs.
For simple examples, where the same benefits are received each period, you can calculate the payback period by dividing the projected total cost of the project by the projected total revenues:
Total cost / total revenue (or benefits) = length of time (payback period).
Custom Graphic Works has been operating for just over a year, and sales are exceeding targets. Currently, two designers are working full-time, and the owner is considering increasing capacity to meet demand. (This would involve leasing more space and hiring two new designers.)
He decides to complete a Cost-Benefit Analysis to explore his choices.
- Currently, the owner of the company has more work than he can cope with, and he is outsourcing to other design firms at a cost of $50 an hour. The company outsources an average of 100 hours of work each month.
- He estimates that revenue will increase by 50 percent with increased capacity.
- Per-person production will increase by 10 percent with more working space.
- The analysis horizon is one year: that is, he expects benefits to accrue within the year.
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