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Valuation Criteria for Cost Benefit Analysis

Valuation Criteria for Cost Benefit Analysis

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Valuation Criteria for Cost Benefit Analysis:
This document explains the valuation criteria for cost benefit analysis. It discusses the common unit of measurement, and it also explains the cost benefit analysis valuations criteria.
Looking for customized help with your cost accounting assignments? Visit http://classof1.com/homework-help/management-accounting-homework-help/

Valuation Criteria for Cost Benefit Analysis:
This document explains the valuation criteria for cost benefit analysis. It discusses the common unit of measurement, and it also explains the cost benefit analysis valuations criteria.

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Valuation Criteria for Cost Benefit Analysis
1. Principles of Cost Benefit Analysis Cost benefit analysis(CBA) is a process which is used to understand the monetary social costs as well as advantages of a capital investment project over a given time period. The principles of cost benefit analysis are based on three principles. The first is the appraisal of any specific project: This is an economic technique which is used by organizations as well as projects being handled by the government. For instance, if an organization invests in upgrading their new information system then it is known as appraisal of the project. Cost benefit analysis can include the economics of time. This is called discounting and takes into account environmental factors which can affect the project in the years to come. If needed, this type of analysis can include social and environmental impacts and private economic costs and benefits. Therefore, cost benefit analysis takes into account social welfare effects of an investment. 2. Common Unit of Measurement To come to the conclusion regarding the desirability of a project, all its facets, and positive as well as negative need to be expressed through a common unit. In most cases, the common unit used is money. This implies that all costs as well as benefits associated with a project need to be measured in terms of their equivalent money value. This type of a program can provide long term advantages which may not be expressed in dollars but through a specific amount of money which the people receive would consider as useful as the project's benefits.

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Subject: Management Accounting 3. CBA Valuations Criteria As revealed by actual behavior The value of costs and benefits need to reflect the preferences disclosed by choices which have been taken. For instance, improvements in transportation are necessary in order to save time. So how is the financial value of money of the saved time period calculated? The value of time should not be what transport planners or commuters think is actually worth. Rather, the financial value of time needs to be what the public discloses through compromise between time and money. Benefits measure by market choices When people buy a specific service or commodity at market prices, it reveals the fact that the items which they buy are beneficial to them in lieu of the money they spent. Clients will enhance the consumption of any particular product to the level where benefit of an additional unit (marginal benefit) is equal to the marginal cost to that specific unit, i.e. market price. Gross benefits of increase in consumption Increase in benefits as an outcome of the increase in consumption is the total of marginal benefit, each time there is an incremental increase in consumption. Since this incremental increase is taken as smaller, this smaller sum goes to the area which comes under marginal benefit curve. The marginal benefit curve is identical to the demand curve. Therefore, the increase in benefits is the actual area which comes under the demand curve.

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Subject: Management Accounting Benefits of valuation of human life This is sometimes a need in CBA to assess the plus points of saving the lives of people. There are considerable reservations among common people to the concept of evaluating a human life on the value of a dollar. There is considerable antipathy in the general public to the idea of placing a dollar value on human life. However, it has been widely recognized that the long term benefits of such a project is in reducing the risks associated with death.

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