How do you conduct a cost-benefit analysis for a new project or investment?

1 Identify the alternatives

The first step is to identify the different options or scenarios that you want to compare. For example, if you are considering whether to buy or lease a new machine, you need to define the terms and conditions of each option. You should also include a baseline option, which is the status quo or doing nothing.

2 List the costs and benefits

The next step is to list all the relevant costs and benefits of each alternative. Costs are the expenses or sacrifices that you incur or expect to incur as a result of the project or investment. Benefits are the revenues or gains that you receive or expect to receive as a result of the project or investment. You should consider both tangible and intangible costs and benefits, as well as direct and indirect ones.

3 Quantify and monetize the costs and benefits

The third step is to assign a monetary value to each cost and benefit, as much as possible. This will allow you to compare them on a common scale and measure their net impact. You may need to use estimates, assumptions, or market prices to quantify and monetize some costs and benefits. You should also account for the time value of money, which means that a dollar today is worth more than a dollar in the future, by using an appropriate discount rate.

5 Compare the alternatives and rank them

The fifth step is to compare the NPV and BCR of each alternative and rank them from the most to the least attractive. The alternative with the highest NPV and BCR is the preferred option, as it maximizes the net benefit. However, you should also consider other factors, such as risk, uncertainty, feasibility, and sensitivity, that may affect the validity and reliability of your calculations.

6 Make a recommendation and justify it

The final step is to make a recommendation based on your analysis and justify it with evidence and logic. You should explain why you chose the preferred option and how it meets your objectives and criteria. You should also acknowledge the limitations and assumptions of your analysis and suggest ways to improve it or test it further.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?