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Examples of Cost-Benefit Analysis
Cost Benefit Analysis Examples can involve comparing the costs and expected benefits of different projects. Suppose there are two projects: Project 1 incurs a total cost of $8,000 and generates total benefits of $12,000, while Project 2 incurs costs of $11,000 and generates benefits of $20,000. Using cost-benefit analysis, the benefit-cost ratio for Project 1 is 1.5 ($12,000/$8,000), while the ratio for Project 2 is 1.82 ($20,000/$11,000). Based on the higher benefit-cost ratio, Project 2 would be considered the more favorable option.
The following Cost-Benefit analysis examples provide an understanding of the various types of areas where an organization can conduct a Cost-Benefit study. The managers of the company conduct the cost-benefit study before selecting any new plant project to evaluate all potential benefits (revenue) and costs that the company may generate if it undertakes and complete the project as the outcome of the analysis will help in determining whether it is financially feasible for the company to start the analyzed project or not.
Cost Benefit Analysis Examples: Project Selection
Financial analysis International Ltd is planning to undertake one project. It has two alternatives, with the following benefits and costs.
Given,
Alternative 1
- The total value of the Costs from project 1 = $ 60 million.
- Benefits available from project 1 = $ 100 million
Alternative 2
- The total value of the Costs from project 2 = $ 10 million.
- Benefits available from project 2 = $ 21 million
I am using the Cost-benefit analysis; which Project the company should choose?
Solution
For deciding which project the company should opt using the cost-benefit analysis, the benefit-cost ratio will be calculated for both of the projects.
Alternative 1
The benefit-cost ratio can be calculated as,
= $ 100 million / $ 60 million
Benefit-Cost Ratio = 1.667
Alternative 2
The benefit-cost ratio can be calculated as,
= $ 21 million / $ 10 million
Benefit-Cost Ratio = 2.1
Analysis: Being both the projects have positive outcomes; both of the projects are beneficial for the company, i.e., the company will be in profit if it undertakes any of the projects. However, as the company has to choose one out of two, the project with a higher benefit-cost ratio will be selected. In the present case, project 2 has a higher benefit-cost ratio, so as per Cost-benefit analysis, project two will be selected by financial analysis International Ltd
Cost Benefit Examples: Business Expansion
Among the practical cost benefit analysis examples, this case demonstrates how a company can evaluate whether the expected benefits of business expansion justify the associated costs.
Sports International limited is planning to expand its business, and for that, it will require four new employees in the organization. For analyzing whether the expansion is beneficial or not, the management of the company decides to use the cost-benefit analysis. The following are the information available related to benefits and costs related to expansion:
- Within the time frame of one year, it is expected that if the company hires four employees for the expansion, then the revenue of the company will increase by 50 %, i.e., the revenue benefit will be around $ 250,000.
- Also, due to the new hiring, the company value of the business will increase, which would result in additional revenue of $ 30,000.
- The salary of the new employees is estimated to be $ 160,000.
- The additional cost of hiring is estimated to be $ 15,000.
- The cost of additional hardware and software required will come at around $ 25,000
Analyze the expansion using Cost-benefit analysis.
Solution
- Total benefit from the project = Increase in revenue from expansion
- Total benefit from the project = $ 250,000 + $ 30,000 = $ 280,000
- Total Cost from expansion = Salary of new employees + Cost of hiring + Cost of additional hardware and software
- Total Cost from expansion = $ 160,000 + $15,000 + $25,000
- Total Cost from expansion = $ 200,000
Now the benefit-cost ratio will be calculated for the expansion.
= $280,000 / $ 200,000
Benefit-Cost Ratio = 1.40
As the expansion has a positive benefit-cost ratio (the total benefits due to expansion is greater than total cost), the company should go ahead with the expansion of the project and hire new employees as that will be beneficial for the company.
Cost Benefit Analysis Examples: Real Estate Investment
Constru Ltd is a real estate developer. It is planning to make the investment for which it came across different investment options. The following are the information available related to benefits and costs related to various investment options:
Option 1
Build 200 flats out of which 100 flats will be given on the rent for 10 years at the rent of $ 2,000 per year. After 10 years, the rented 100 flats would be sold out at the price of $ 100,000
On the cost side, the cost of construction would come to $ 110,000 per flat, which can be sold at $150,000 each. Apart from the construction cost, the cost of sales and staff would come to $ 700,000 per year. The financing cost of the project would be $1,500,000, and the project would last for two years.
Option 2
Build 100 flats out of which 20 flats will be given on the rent for 5 years at the rent of $ 3,000 per year. After 5 years, the rented 20 flats would be sold out at the price of $ 120,000
On the cost side, the cost of construction would come to $ 150,000 per flat, which can be sold at $200,000 each. Apart from the construction cost, the cost of sales and staff would come to $ 450,000 per year. The financing cost of the project would be $4,000,000, and the project would last for one year.
This is one of the cost benefit analysis examples that demonstrates how expected costs and benefits can be compared when choosing between different investment options.
Solution
Option 1
The benefit-cost ratio can be calculated as,
= 27000000 / 26400000
Benefit-Cost Ratio = 1.02
Option 2
The benefit-cost ratio can be calculated as,
= 18700000 / 17900000
Benefit-Cost Ratio = 1.04
We can see that the Benefit-cost ratio of option 1 is 1.02, and option 2 is 1.04. When we compare both options, option 2 has a higher benefit to cost ratio, and therefore the company should choose it over option 1.
These cost benefit analysis examples show how organizations can compare expected benefits with associated costs when evaluating projects, expansion plans, and investment opportunities.
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