Accounting assignment help on: Cost Benefit Analysis
The Cost-benefit analysis refers to a term which can have the following meaning that is:
To take any type of economic decision making process,
Or,
- Technique which would help in the proper assessment of the project, evaluating it on the basis of costs to be put in as well as the benefits which would be drafted after the implementation of the particular project.
The two definitions listed above states a common feature of the cost benefit analysis i.e. it evaluates, computes the total cost to be invested in the implementation a project against the benefits which would be drafted out of it & to take a fair decision whether the project should be undertaken or not.
There is an official process which is to be undertaken while evaluating the profitability of the project. This process is commonly known as the Cost Benefit Analysis (CBA) or the Benefit Cost Analysis (BCA).
The main goal or the objective of any authority in order to do a Cost Benefit Analysis before implementing a particular project is to compare the benefits against the cost invested. The benefits as well as the cost should be stated in monetary terms should be regulated on the time value of money principle. This method is to be followed which would help in the proper surge of the benefits as well as the cost invested in the project over a specified period of time. The two terms are listed as the most general terms i.e. present value.
The benefit cost analysis is majorly employed by the financial authorities who finance the project as well as the government in order to check the feasibility of the project whether cost invested would be at par the profits yield.
In today’s scenario, this type of technique is of major use & plays very important role while assessing, evaluating the project. These techniques refers to an investigation regarding the effectiveness of the cost as well as takes into consideration the various options available & then compare the cost invested and the amount of benefits reaped.
The main goal of such type of a technique is to look into the effectiveness as well as the efficiency of the interference relative to the status quo.
The costs invested & the benefits reaped leads to an impact & totally depends upon the willingness of the public to pay for the benefits or to avoid paying for the cost.
CBA Components & its process:
The cost benefit analysis refers to a process which constitutes series of steps which would help in the proper evaluation of the project to be implemented in the years to come. The steps are listed as under:
- An overview regarding the project to be undertaken: The first & the foremost step in the process of Cost Benefit Analysis is to prepare a brief overview regarding the project to be undertaken. It should include the following aspects such as the existing scenario of the environment, the goals, aim, objective, why this project is to e undertaken, the various hypothesis/assumptions, & the life of the project etc.
- Alternative scenario available: The second step in the process of Cost Benefit Analysis is to search for the various alternatives available. After searching the various alternatives, the best option is to be considered on the basis of the cost invested & the benefits reaped out of the project. The cost & benefits would help in order to choose amongst the various options available.
- Identification of the Costs & Benefits: After searching the various alternatives available, a systematic list of the benefits & the cost which is required in order to meet the specified requirement of each & every option is to be looked upon.
Under this step of CBA, the costs are divided under two heads i.e. the one which could be measured straightforwardly, the other which could not be measured directly & the costs are to be measured on the various factors in order to estimate the various alternatives available. It is as under:
All the cost whether direct or indirect is to be taken into consideration for each & every alternative available. The various factors should be taken into consideration such as Cost Categories, Depreciation, Activities & Resources, Personnel Costs, Direct and Indirect Costs (Overhead), & the Annual Costs.
- The second main factor to be taken into consideration apart from the cost refers to the benefits which are the services, benefits reaped from the alternatives available in return of the investment (cost) made. Once the benefits have been identified, the performance of the each option is to be checked. The major aspect of this process is to figure out the worth of the benefits.
- Schedule Benefits and Costs: For the option available in Step 2, the concerned authority keeps into consideration the worth of each & every cost as well as the benefits of the project from the time line, beginning at year 0 which refers to the beginning of the decision making process.
Once the costs & the benefits for every year is calculated, it is then converted into a common unit of measurement which would help in the comparison of all the alternatives available easily.
The calculation of the cost & benefit is to be done on the basis of the discounted value known as the “Present Value”. The PV for the future amount is to be calculated on the basis of the following formula i.e. P = F (1/ (1+I) n), {where F = Future Value, P = Present Value, n = number of years & I = Interest Rate}.
- Evaluation of the substitutes available: The next step in the process of CBA is to compare all the substitutes available. The evaluation of all the options would be done on the basis of the various tables which would help in fair decision making.
It is to be noted that the benefits as well as the costs available is to be discounted, a fair computation is to be done. Ranking the net values would help in order to compare it with the alternatives available. When the option having the least discounted cost offers the maximum concessional profits, then it is to be treated as one of the best substitute.
- Sensitivity Analysis: The last step in the process of Cost Benefit Analysis is to highlight how sensitive are the users upon the change amongst the cost as well as the benefits.
This analysis would help to test reliability & the sensitivity of the results obtained. This analysis highlights all those parameters which would have a great effect upon the conclusion. The same procedure is repeated with another set of parameters & sees the sensitivity of each parameter.
It is to be noted that if a small change in a parameter leads to significant changes, then the particular analysis tends to be more sensitive upon that parameter. The parameters which are sensitive should be taken into consideration & it should be tried to eliminate such parameters as early as possible.
Nam Pong Water Resources Project in Thailand:
The Nam Pong water Resource project was commenced in the year 1964 in Thailand. The project covers approximately 15,000 square kms of drainage basin, near the river in the Northeastern Thailand. This particular project covers a watershed & a lakeshore area of approximately 12,000 square Km, 410 square Km reservoir, a hydroelectric plant, canals to provide irrigation facilities in about 500 square Km field & covering 664 square Km of reservoir site evacuees.
The Nam Pong refer to a n irrigation project which has been set up on the left hand side of the river bank covering approximately 33,900 hectare of land which was significantly reduced to 29,400 hectares. It is estimated that the number of families living in the irrigation zone amounts to 9,800 & 58,800 people live in the potential irrigated piece of land i.e. 29,400 hectares (HA).
Alternatives available:
There are various alternatives available for the Nam Pong water project development. All the alternatives are to be fairly evaluated & the best alternative is to be chosen.
Some of the main alternatives are listed as under
° Water resource development in Isaan, Thailand
° Thailand Integrated Water Resource Management (TIWRM)
° National Wetland Biodiversity Project, Thailand
The Nam Pong Water resource project has been thought of implementing as it is one of the most cost effective proposals & the only proposal which would help in irrigating maximum number of fields.
Log Frame (summarizing Nam Pong Water Project, Thailand)
| Narrative Summary | Measurable Indicators | Means of Verification | Important Assumptions |
| Goal (main objective) | |||
Reservoirs, Better Irrigation system Net Present ValueCost benefit analysis reportGoal to Super Goal
Purpose: (main aim)
Serve multiple purpose i.e.
Ensure proper fish stock in the reservoir, better manipulation of the water level.End of Project Status
• extra 40 GL water consumption by 2030
• extra 140,000 residents
• ambient pollution downstream• ACTEW
market price
• ABS popn stats
• Annual SoE report
contingent valuation
Purpose to Goal
• water is sufficient to meet the irrigation requirementsOutputs: (deliverables or terms of reference)
• Reservoirs
• Aquatic Biota
• Land Biota
Terms of reference for each output
• 40 GL capacity pa by 2014.
• ambient pollution downstream.• End of project report
• Annual SoE reportOutput to Purpose
• The number of reservoirs made
• Urban design unchanged.Activities: (work breakdown structure)
• Environmental, Economic & financial Impact
• Construct dam, water treatment plant & pipeline
Inputs: (Men, Material, Money, time)
• Labor required to irrigate the land
• River water
• Material
• A budgeted project report
Activities to Output
• Feasibility of the technology used
• Permission from the government to extract water.
• Construction standards met. 
The log frame mentioned above refers to a brief summary of how the things would work out, once the approval is being made by the government authorities.
The log frame specifies the goal, purpose, activities as well as the output of the project. The log frame depicts a fair relationship between the inputs & the output. The assumptions highlighted in the end column, indicates the issues that could go wrong hence, risk or sensitivity analysis is to be done.
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