what is it? what use is it? how do you do it? what is it? what use is it? how do you do it? richard...
TRANSCRIPT
What is it?
What use is it?
How do you do it?
What is it?
What use is it?
How do you do it?
Richard Harrison-MurrayResearch [email protected]
Cost-Benefit Analysis
Cost-Benefit Analysis
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
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)
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 !
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
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