A Cost Benefit Analysis

Example and
Calculation Steps
by Presented to
Ahmed Gamal Dr Abdulrahman Mostafa
Samuel Adel Managerial Economics
Ahmed Sabry
Amany Basiouny
Shady Abd El-Salam
Hussein Abdel Mohsen
What is Cost Benefit Analysis?

Cost benefit analysis (CBA) is a systematic approach to evaluate the costs and benefits of a decision or
project. It helps in assessing whether the benefits outweigh the costs, and if the investment is worth pursuing.
Why is it Important?
CBA is essential for effective decision-making as it provides a structured f
framework to consider the financial and non-financial impacts of a decision.
It allows for a more comprehensive evaluation and reduces the risk of making costly mistakes.
 Three Decision Pitfalls

Three general cases of mistakes

1. Measuring costs and benefits as proportions instead of absolute amounts

2. Ignoring implicit costs

3. Failure to think at the margin

 Pitfall #1

Measuring costs andbenefits as proportions instead of

absolute amount

z Would you walk to town to save $10 on a $25 item?

z Would you walk to town to save $10 on a $2,500 item?
 Pitfall #2
Ignoring implicit costs
• Consider your alternatives

The value of a Frequent Flyer coupon depends on its next

best use
• Expiration date
• Do you have time for another trip?
• Cost of the next best trip
Pitfall #3

Failure to think at the margin

• Sunk costs cannot be recovered

Examples:
• Eating at an all-youcan-eat restaurant
• Attend a second year of law school
Steps of Cost Benefit Analysis
Identify Benefits
Identify and quantify the benefits of the
decision or project, such as increased
revenue, cost savings, improved
efficiency, or intangible benefits.
Compare Costs and Benefits
Compare the total costs and benefits to
gauge the net benefits. Consider the
time value of money and the project's
duration.
1 Identify Costs
Identify all the costs associated with the
decision or project, including initial
2 investment, operational expenses, and
any ongoing costs.
3 Calculate Net Present Value
Calculate the net present value (NPV)
by discounting the future benefits and
costs to the present value. NPV helps
4 determine the profitability of the
decision.
5 Make a Decision
Based on the cost-benefit analysis,
make an informed decision on whether
to proceed with the investment or
project.
Case Study
In order to simplify the cost-benefit analysis example, we will not use
a discount rate for each cost and income.

Project 1

– 500 housing units will be constructed.

– 400 of them will be sold and 100 of them will be rented for 20 years.
– Rental Price of each unit is 4,000 USD per year
– Rented 100 units will be sold 70,000 USD after 20 years.
– Construction Cost of each unit is 100,000 USD.
– The sale price of each unit is 120,000 USD.
– The project needs a luxury sales office with a price of 2,000,000 USD.
– The sales personnel cost is 300,000 USD per year.
– The project duration is 3 years.
– Project financing cost is 3,000,000 USD per year
Case Study
In order to simplify the cost-benefit analysis example, we will not use
a discount rate for each cost and income.

Project 2

– 400 housing units will be constructed.

– 350 of them will be sold and 50 of them will be rented for 15 years.
– Rented 50 units will be sold 80,000 USD after 15 years.
– Rental Price of each unit is 4,500 USD per year
– Construction Cost of each unit is 90,000 USD.
– The sale price of each unit is 135,000 USD.
– The project needs a luxury sales office with a price of 3,000,000 USD.
– The sales personnel cost is 250,000 USD per year.
– The project duration is 2 years.
– Project financing cost is 2,500,000 USD per year
Case Study
Comparing the Project Parameters
In this cost-benefit analysis example, we will calculate the amount of money to be spent and the
amount of money to be earned from each project to address economic efficiency.
The below table summarizes all the given project parameters.
Case Study
Cost Calculations
Below table summarizes the project costs.

Benefit Calculations
Below table summarizes the project benefits.
 Cost Benefit Analysis-Costs and Benefits Comparison

Case Study
Costs and Benefits Comparison
Conclusion

In this simple cost benefit analysis example, there are too many parameters affecting the board’s decision.
Financing costs per year, units for sale, units for rent, total units to be constructed are some of them that make
decision making difficult.
The above table summarizes the benefits, costs, and profits of each project. Although the income of Project 1 is
more than Project 2, the costs of Project 2 are less than the costs of Project 1.
It is obvious that Project 2 is more profitable than Project 1. If the board chairman selects Project 2, the
company will earn more profit by spending less money.
This simple example shows that Cost Benefit Analysis is a useful calculation tool in economics. Decision makers
often use it while comparing multiple projects.
Case Study
Investments Options CBA

1. High-yield savings accounts

2. Certificates of deposit
3. Treasury bills
4. Real Estate
5. Stock market
6. Bonds
7. Cash
8. Commodities
Case Study
Stock market (EGP vs. USA) (55.67% vs. 11.13%)
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Mutual Funds: NBE Fund 2 - Periodic Income Fund – Equity (52.16%)
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Mutual Funds: NBE Fund 1 - Cumulative & Periodic Income - Balanced Fund (48.46%)
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Mutual Funds: NBE Money Market Fund – cumulative and periodic income fund - Money Market (17.03)
Case Study
Certificates of Deposit: 3 Years (19-20%)
Case Study
Arab African International Bank High-yield saving account (20%)
Case Study
Investments Options

Option Example Benefits (Interest rate per year) Cost

Stock market EGX-30 55.6 %
Mutual Funds NBE Fund 2 - Periodic Income Fund – Equity 52.16%
Mutual Funds NBE Fund 1 - Cumulative & Periodic Income - Balanced Fund 48.46%
Treasury Bills 1 Year 21%
Certificates of deposit 3 Years 20%
Tangible and
High-yield savings accounts Arab African International Bank savings account 20% Intangible
Mutual Funds NBE Money Market Fund – cumulative and periodic income 17.03%
fund - Money Market
Real Estate Cairo 10 ~ 100 %
Commodities Precious metals (Gold & Silver), oil, food and drinks. 10 ~ 100 %
Cash EGP 0
Case Study
Cost Analysis
Thank You