Practitioner's Guide to Cost Benefit Analysis

Cost benefit analysis (CBA) is becoming a more relevant skill to not only economists but to anyone involved in investment decisions. Many jobs in both private and public sectors require some knowledge of CBA. For the public sector, many projects are focused on meeting social outcomes. A CBA can quantify the benefits and costs linked to how these outcomes are achieved. For the private sector, the impacts of most major projects spread beyond the business and its customers. It is important for businesses to quantity these impacts and determine if they are negative or positive.

This course has been divided into four sections. See as follows:

- Introducing Cost Benefit Analysis

- Preparing a Cost Benefit Analysis

- Conducting a Cost Benefit Analysis

- Understanding Cost Benefit Analysis

Section 1, introduces the course, the course assessment and CBA. The course assessment involves multiple-choice questions at the end of each section and a CBA question at the end of the course. The introduction of CBA is spread over two units. One unit defines CBA and breaks down the definition into easy to understand segments. The other unit explains why CBA is useful as well as the role that it can play in decision-making.

Section 2 explores the work that needs to be done prior to conducting the analysis. This includes:

- structuring the CBA so that steps are clearly defined

- identifying the problem/s the initiative/project intends to solve or mitigate

- identifying the outcome/s the initiative/project intends to achieve

- identifying possible options that could eventually become the initiative/project

- identifying what the state of the would be like with (project case) and without (base case) the project

- Identifying those most likely to be affected by the project

- Steps to reduce the number of options prior to conducting a CBA

Section 3 explains how to conduct a CBA. The content of this section builds off what has been discussed in Section 2. At this point, the practitioner should have established which project/s to analyse. This section introduces important steps such as:

- identifying project cost, benefits, and impacts

- collecting data

- assigning unit values to collected data in order to obtain monetise costs and benefits

- projecting and forecasting future costs and benefits

- estimating costs and benefits

- calculating economic measures and indicators

- applying risk to results

This section also explains key CBA terminology and concepts that are required to conduct a CBA such as:

- evaluation period

- discounting

- methodology

- assumptions

- induced demand

Section 4 considers additional information that a practitioner needs to know to understand CBA, the outputs it produces and complementary evaluation techniques. This section begins by discussing the limitations, common mistakes, and potential abuse of CBA. It is important to understand what can go wrong with a CBA so that a practitioner can recognise it and prepare for it. This section also explores complementary tools to CBA such as wider economic impacts, general equilibrium modelling, social impact evaluation, and appraisal summary table. CBA is more informative if it is supported by other evaluations techniques. This section also considers CBA in the bigger context by exploring program evaluation and ex-post evaluation/CBA. CBA does not need to be focused on only one project or always be required to be conducted at just one particular moment in time. This section finishes up with examples of CBA and a sample CBA for students to try.