Cost Benefit Analysis - EU Seguros

What is Cost-Benefit Analysis?

Cost-Benefit Analysis is a technique designed to determine the feasibility of a project or plan by quantifying costs and benefits including external costs and benefits.

It essentially compares the costs and benefits of a project and then makes a decision on whether or not to proceed with the project.

How to do a Cost-Benefit Analysis?

To do a cost-benefit analysis, you do the activity if the Marginal Benefit ≥ Marginal Cost

Suppose you are presented with two investment opportunities:

Project #1:

Total benefits = $20,000

Total Costs = $12,000

Project #2:

Total benefits = $30,000

Total Costs = $45,000

Between both cases, you would do Project #1 as it has a Net Benefit of $8.000 ($20.000-$12.000 = $$8.000) and wouldn’t do  Project #2 as it had a negative net value.

In Economics you keep buying if you perceive to gain value from the transaction. So the Consumer Surplus is positive.

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