Cost-Benefit

The Steps in a Cost-Benefit Analysis




These are the steps in a cost-benefit analysis:


1. Identify the consequences of the given action in each period in
the future.

2. Classify the consequences into positive and negative—the goods
and the bads, incomes and outgoes, costs and revenues—and
state each of them numerically. If a consequence is uncertain,
state it as a probability.

3. Apply an appropriate weight to each individual consequence.
The weights will be different for different time periods.

4. Combine the weighted consequences for the given alternative
into a single summary number—technically known as the
“present value.”

5. Compare the summary number for the various alternatives being
considered, and choose the alternative that has the highest
present value.