Importance Of Cost And Benefit Analysis In Decision Making

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Cost advantage analysis suggests analyzing and assessing ‘costs’ and ‘benefits’ prior to taking a particular choice. By comparing costs with the benefits, it becomes simpler to take a decision.

This technique is regularly utilized in making crucial choices like expansion of company, entry into a brand-new market, replacement of an old device, and so on.

Let’s understand how Cost Advantage Analysis can be used with the help of an example:

A single proprietor is having issues in monitoring accounts receivables. As a result of which, he’s not able to recover the fees on time. To deal with this trouble, he consults his friend who’s an invoices manager in a reputed concern. His buddy advises him to get a computerized invoices solution. Before investing in the product, owner decides to do a cost benefit analysis.

He considers the advantages that he’s getting in regards to easy monitoring, quick collection and lowered invoices balance, better handling of customer issues, less manual obstruction and so on. While thinking about the cost factor, he considers the anticipated repayment duration, existing capital availability, application process in terms of time and complexity, costs of training staff on the new system and so on.

After doing this analysis, owner concerns a decision that the costs connected with keeping receivables is far higher than the cost of acquiring and executing the automated solution. He believes that since there will be a quick turnover of receivables with this system; he’ll be able to make use of funds for development of his company as well as enhance upon his sales.
Above discussed picture indicates a business circumstance. Cost benefit analysis can also be executed at a specific level.

Let’s take an example of how an individual could utilize this technique for taking a decision.

You decide to change your desktop computer with a brand-new laptop. You might connect following advantages with a laptop computer:

a)    Improved technology.

b)    Less space requirement.

c)   Mobility. You could hold your notebook at crucial meetings; do job work, browse net on the move and so on.

d)   Faster interaction. You don’t need to worry about reaching home to respond to vital mails.

e)   Limited problem due to power supply disconnection. You could work regularly for a couple of hours even when there’s no electricity.

Now you assess expense on the basis of:

a)   Capital needed for getting the notebook. You can likewise base your decision on whether installment facility is readily available or not.

b)   Expense of maintenance. You could take annual upkeep or decide to obtain it repaired as and when the demand develops.

Cost benefit analysis can help in taking quick decisions. To have a correct cost perk analysis, it becomes crucial to quantify the costs and perks, otherwise it might become hard to make an ideal contrast. Some advantages and expenses don’t happen instantly, however might take place in the near future. For this reason, it becomes important to use the concept of time value of money to get to present worth of all current as well as future benefits and expenses.