Cost Benefit Analysis

Wasantha Rathnayake
 CBA
Cost-benefit analysis is a method of measuring
and evaluating the relative merits of public
expenditure based on sound economic
principles.
Project justification is measured as economic
worth to society.
 Steps in Methodology

1. Defining the project objectives and scope

2. Defining the project options which form the basis of the economic
evaluation
3. Defining the base case against which the project options are compared
4. Identifying the incremental costs and benefits that might be expected in
moving from the base case to each of the options
5. Undertake traffic modeling of the options (Note: undertaken by SMEC
International)
6. Identifying and agreeing the core parameters of the evaluation (e.g. time
scale, base year for prices to calculate present dollar values, discount rate)
7. Where possible, quantifying the costs and benefits over the expected
lifecycle and discounting future values to express them in current equivalent
values
8. Building the CBA model using discounted cash flow techniques over the
evaluation period and generating performance measures including:
 Steps in Methodology

Net Present Value (NPV)

Benefit Cost Ratio (BCR)
Internal Rate of Return (IRR)
9. Testing the sensitivity of these performance
measures to changes in the underlying assumptions
utilized
10. Ranking the options according to Net Present
Value to determine which option represents the
best performing in value for money terms.
 Decision criteria

In the extended cost benefit analysis,

following criteria were considered as decision
criteria.
Net Present Value (NPV)
Benefit Cost Ratio (BCR)
Internal Rate of Return (IRR)
 Benefit Cost Ratio (BCR)

The Benefit Cost Ratio (BCR) is the ratio of the

present value of benefits to the present value
of costs and measures the relative net gain of
the proposed expenditure.
 Net Present Value (NPV)

The Net Present Value (NPV) measures the

actual or real net economic benefit of the
project. While the BCR provides a ratio of
benefits to costs, the NPV measures the
absolute net economic gain.
 Internal Rate of the Return (IRR)

Internal Rate of Return (IRR) is the discount

rate at which the present value of benefits
equals the present value of costs (where NPV
equals zero).
Discount Rate