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The %& Most Asked 'uestions o( Cost Bene(it Analysis
By:
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.et/s start0 shall +e1
'uestion 2%3 Is this techni4ue suita*le (or the small *usiness o+ner1
5es3 The theory +orks e4ually as +ell (or small *usiness as it does (or *ig *usiness and
government3
Cost Bene(it Analysis is a decision6making techni4ue that assesses the -ositive outcomes
7*ene(its8 as +ell as the negative outcomes 7costs8 o( di((erent decision alternatives3 The trick is to
make its im-lementation easy (or the small *usiness-erson3
Once you have *asic kno+ledge o( the theory and can enter data into a s-readsheet then the rest is
not too di((icult3
'uestion 293 Is this all I need to make *etter decisions1
No3 Cost Bene(it Analysis is a tool to assist in making *etter (inancial decisions3 It is not an end in
itsel(3 Ho+ever0 -art o( the Cost Bene(it -rocess re4uires that you think +idely on all o-tions
*e(ore making a (inal decision3 This is o(ten +here most -eo-le (ail in their decision6making
attem-ts3
Cost Bene(it Analysis is also very skil(ul at -roviding a single via*ility out-ut (or each com-eting
o-tion0 making com-arisons o*:ective and easy3
'uestion 2;3 hat do I include as the Costs and the Bene(its1
Costs3 All costs attri*uta*le to the -ro:ect are to *e included3 )ome o( these are listed *elo+:
6 Asset Costs 7*oth Ca-ital and ongoing8
6 )u--ly costs (or -urchased items
6 !<tra administrative e((ort re4uired to manage -ro:ect
6 =elivery costs i( to your account
6 #e-lacement o( assets in (uture years
6 Tender -re-aration costs
6 Any s-ecialised tooling associated +ith the -ro:ect
#evenue3 #evenue can only *e attri*uted to a -ro:ect i( it +ere not received +ere the -ro:ect not to
go ahead3
Asset =is-osal and #esidual >alues3 )ome assets may *e retired -rior to the end o( their use(ul
lives or may *e salvaged at the end o( the -ro:ect3 This value is to *e included in the cash (lo+s
7less the costs associated +ith their sale or dis-osal83
Cost )avings3 All cost savings attri*uta*le to the -ro:ect are to *e included3 age and salary cost
savings must include their overheads and on6costs3
'uestion 2?3 Ho+ do I treat non6(inancial costs and *ene(its1
)ince only cash transactions 7*oth costs and *ene(its8 are included in Cost Bene(it models0 non6
(inancial costs and *ene(its are usually descri*ed *y +ay o( notes3
I( the Bene(it Cost #atio is @ to % or A % then the use o( non6(inancial costs and *ene(its +ould not
*e re4uired since the -ro:ect is already >IAB.!3 Normally these non6(inancial costs and *ene(its
+ould *e included +hen com-aring com-eting o-tions +hose Bene(it Cost #atio is close to each
other3
'uestion 2B3 Ho+ can I test my assum-tions1
5ou are *est -laced to make assum-tions *ased on your o+n e<-erience and :udgement3 Ho+ever0
you can use a techni4ue to sho+ others ho+ ro*ust your assum-tions really are3 This techni4ue is
called )ensitivity Analysis3
This techni4ue is im-ortant to understand *ecause you have made many assum-tions in your
analysis3 These could have *een0 (or instance0 the level o( ne+ income generated0 the savings
generated or the residual value o( the asset at the end o( the -ro:ect li(e3 These assum-tions are at
the heart o( your analysis and have contri*uted to your (inal Bene(it Cost #atio outcome3
)ince the (uture cannot *e accurately -redicted there is a high -ro*a*ility that some o( your
assum-tions may -rove incorrect3
Csing this techni4ue +ill add conviction and +eight to your -ro-osal *y sho+ing ho+ changes to
costs and *ene(its a((ect the Bene(it Cost #atio3 =o small changes move the -ro:ect (rom >IAB.!
to CN>IAB.!1
'uestion 2D3 Ho+ can I *e sure that the -ro:ect is >IAB.!1
5ou have made your assum-tions *ased on your -ro:ect kno+ledge and e<-erience3 5ou have
constructed the model that sho+s the -ro:ect to *e >IAB.!3 I( you have (ollo+ed the -roven
-rinci-les it should +ork out OK3 Once the -ro:ect has *een authorised it is im-ortant to ensure
that the assum-tions are correct and in (act are delivera*le3
To ensure this ha--ens (ollo+ u- on these items:
6 Any la*our savings must *e delivered 6 re6assign a((ected resources
6 Cost savings due to -rocess changes must *e acted u-on s+i(tly
6 Increased revenue (rom -rice rises must *e im-lemented urgently
A Eost Com-letion #evie+ undertaken a year (rom the -ro:ect/s im-lementation +ill sho+ you i(
all or some o( your assum-tions -roved correct3 It +ill also teach lessons on ho+ this could done
more success(ully ne<t time rather than making the same mistakes again3
'uestion 2F3 Ho+ can I im-lement this techni4ue in my com-any1
There are a num*er o( +ays as (ollo+s:
6 Cse Cost Bene(it Analysis yoursel( in a -ilot -ro:ect
6 Convince the C!O o( its *ene(its to the com-any and use that authority
6 Cse Cost Bene(it Analysis in a s-eci(ic *usiness unit
All o( these +ays re4uire a thorough understanding o( the theory0 the reasons (or its
im-lementation and the e<-ected -ayo((s3
A training -rogram +ould need to *e undertaken so that all those involved understood the
techni4ue3
'uestion 2G3 hy does it have to include NE> to account (or the time value o( money1
Ty-ically the li(e o( the assets0 or the decision *eing made0 +ill have a (inancial im-act over more
than % year3 This is usually ; 6 B years 7com-uters0 so(t+are0 (actory machinery80 9& years (or
some large electrical e4ui-ment and even u- to %&& years (or underground -i-es as used in +ater
and se+er reticulation3
In(lation0 year *y year0 reduces the *uying -o+er o( the dollar causing us to s-end more each year
in dollar terms to -urchase the same item3 )o it is +ith -ro:ects +hose li(e s-an is more than one
year3
Costs and *ene(its that occur in year ; or ? o( the -ro:ect +ould not have the same im-act as i(
they occurred in year one3
The Bene(it Cost #atio and the (inal decision regarding >IABI.IT5 could *e com-letely +rong i(
NE> is not used in the model3
'uestion 2H3 Are there any limits to its a--lica*ility1
Not really0 as long as you are dealing +ith (inancial costs and *ene(its3 It has a--lication to large
and small decisions0 com-le< and sim-le0 long lived and short lived assets0 also -ro(it *ased and
government and charities3
There are some general limitations:
)u*:ectivity 6 It is 4uite unlikely that t+o analysts +orking se-arately +ill estimate e<actly the
same Cost Bene(it #atio num*er3 There are many varia*les that can *e treated slightly di((erently0
some o( +hich are listed *elo+:
6 !stimation o( -hysical andIor economic li(e o( the assetI-ro:ect
6 !stimates o( costsI*ene(its o( environmental -rotection
6 The choice o( discount rates 7the rates illustrated a*ove are indicative o( a range +hich could *e
a--lica*le8
6 The value o( *ene(its can *e di((erent (or di((erent grou-s in society 7i3e3 the value o( a J to the
-oor section o( the community is di((erent to that o( the a((luent class8
Eolitical =ecision Making 6 The necessity o( making -olitical :udgements on the via*ility o( the
-ro:ect 7timing o( elections0 regional loyalties8 can s+ay an outcome3 Also decision6makers are
not consistent over s-ace and time3
First #ound !((ects 6 e +ould normally only include the e((ects that are directly attri*uta*le to
the -ro:ect going ahead3 e +ould not0 (or instance0 include the increased community agricultural
out-ut generally due to a -ro:ect going ahead3 This +ould only *e :usti(ied i( the sector +as
originally under6em-loyed3
'uestion 2%&3 Ho+ can this techni4ue actually hel- me1
There are many +ays 6 some are listed *elo+:
6 Increases your con(idence kno+ing you have used a -roven relia*le method3
6 Having thought o( all the o-tions (or solving the -ro*lem you can -resent your -ro-osal kno+ing
you have the ans+ers3
6 Csing this techni4ue +ill ensure you gain recognition and more o--ortunities (or advancement
6 Once the com-any sees the *ene(its o( this techni4ue it may +ish you to *e the trainer o( other
sta(( or the im-lementation cham-ion 6 more o--ortunities (or you3
6 This techni4ue +ill you save time in -ro:ect assessment and ranking o( com-eting -ro-osals3
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A*out The Author0
Bruce Hokin is an e<-erienced accountant 7FCEA83 His main interests are in *etter decision6
making and Cost Bene(it Analysis training3 5ou can (ind more o( his in6de-th F#!! articles0 a
F#!! Ne+sletter and F#!! e6Lines at his +e*site3 To sign u- (or his com-rehensive0
do+nloada*le Cost Bene(it Analysis training -rogram MB )te-s to Cost Bene(it MasteryM :ust go to
his +e*site3 5ou could *e using this techni4ue in under 9 hoursN Availa*le at
+++3thecost*ene(itcoach3com
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