APPLIED ECONOMICS

Minimizing and Maximizing

Business’s Impact

COST BENEFIT ANALYSIS

1. define cost-benefit analysis; and
2. understand the process of cost-benefit analysis.
 Trade Off
Vs.
Opportunity Loss
or
 Economics is all about making
choices, in order to make best
possible use of the scarce resource.
Whenever we make a choice among
various alternatives, we must forgo
other options. In this context, two
economic terms are often
misconstrued, which are the trade-off
and opportunity cost.
Trade-off denotes the
option we give up, to
obtain what we want.
Opportunity cost is the
cost of the second-best
alternative given up to
make a choice
Cost Benefit Analysis
(CBA)
 Cost Benefit Analysis
(CBA)

Cost
Benefit
A Cost-benefit Analysis (CBA) is a
process that the businesses use to
analyze decisions. It is used most often
at the start of a program or project
when different options or courses of
action are being appraised and
compared, as an option for choosing
the best approach.
Project: Replacement of Lighting
System in a Commercial Building
Alternative 1: LED Lighting
Alternative 2: Fluorescent Lighting
Costs Costs
Alternative 1 (LED Lighting): Alternative 2 (Fluorescent Lighting):

Installation: PHP 300,000 Installation : PHP 150,000

Maintenance/year: PHP 10,000 Maintenance/year: PHP 15,000
Upgrading Upgrading
(estimated every 5 years): PHP 50,000 (estimated every 3 years): PHP 30,000
Benefits Benefits
Alternative 1 (LED Lighting): Alternative 2 (Fluorescent Lighting):

Energy Saving: PHP 50,000 Energy Saving: PHP 30,000

Lifespan: 10 years Lifespan: 5 years
Environ. Benefit Environ. Benefit
Reduced energy consumption Reduced energy consumption
and carbon emissions. and carbon emissions.
Analysis (A1)
Calculate the total costs over a 10-year period

Investment: 300,000.00
Maintenance: 10,000 x 10 years 100,000.00
Upgrade (Twice in 10 years)
50,000.00 x 2 100,000.00
Total Cost 500,000.00
Analysis (A2)
Calculate the total costs over a 10-year period

Investment: 150,000.00
Maintenance: 15,000 x 10 years 150,000.00
Upgrade (Thrice in 10 years)
30,000.00 x 3 90,000.00
Total Cost 390,000.00
Analysis
Calculate the total costs over a 10-year period

Alternative 1 = 500,000.00
Vs
Alternative 2 = 390,000.00
Analysis (A1)
Calculate the total benefits over a 10-year period

E. Saving ( 50,000 x 10 ) 500,000.00

Total Benefits 500,000.00

Analysis (A2)
Calculate the total benefits over a 10-year period

E. Saving (30,000 x 10) 300,000.00

Total Benefits 300,000.00

Analysis
Calculate the total benefits over a 10-year period

Alternative 1 = 500,000.00
Vs
Alternative 2 = 300,000.00
Analysis
Calculate the net benefits

Net Benefits (Alternative 1)

= Total Benefits (Alternative 1) - Total Costs (Alternative 1)

Net Benefits (Alternative 2)

= Total Benefits (Alternative 2) - Total Costs (Alternative 2)
Analysis
Calculate the net benefits

Net Benefits (Alternative 1)

= 500,000.00 – 500,000.00

Net Benefits (Alternative 2)

= 300,000.00 – 390,000.00
Analysis
Perform a sensitivity analysis:

Consider factors such as changes in energy costs,

maintenance costs, and lifespan estimates. Evaluate how
these changes would impact the net benefits of each
alternative.
Analysis
Evaluate intangible benefits:

Assess other factors like improved lighting quality,

reduced maintenance requirements, and potential
incentives or rebates from energy-saving initiatives.