The Significance and Advantage of Comparing a Project Expenditure to Its Benefits

CBA is the process of quantifying benefits and costs of a project, decision or a program in a given period (Brealey et al., 2012). The CBA analysis estimates the NPV (net present value) of the project by invest and returns discounting. Inclusively, the Rate of Investment (ROI), Tangible and Intangible Costs are used to arrive at a justifiable estimate in Cost-Benefit Analysis (CBA). Moreover, the Cost-Benefit Analysis is analyzed through several calculations in order to determine the true and accurate figures. The situation benefits are summed up while the situation costs are subtracted. Some business analysts develop a model to attach a monetary value to intangible products. CBA factors in opportunity costs in the cost-benefit equations (Brealey et al., 2012). Most of the managers before taking up any business decision, they conduct a CBA to evaluate all the potential revenues and costs that may arise in the course of product completion.

CBA application determines whether the managers are able pursue a certain project or take an alternative project. Benefits in the equation include direct revenues, indirect revenues, goodwill sales and intangible benefits while the associated costs sum up the direct costs, indirect, intangible, potential risk and opportunity costs. A careful approach with a reasonable effort to avoid attached tendencies in the calculations should be applied when allocating costs and benefits value for the CBA (Baihaqi & Sohal, 2013).

Cost-Benefit-Analysis (CBA) estimates the strengths and weaknesses of the decision or project alternatives (Baihaqi & Sohal, 2013). The CBA justifies an investment or decision as well as comparing several decisions and policies. Additionally, enterprises and individuals use the analysis to appraise the justification of a given decision or policy and balance the costs and benefits. Moreover, the analysis predicts whether the costs of a decision outweighs the benefits and provides the margin concerning other related alternatives. The paper seeks to illustrate the estimation of Cost-Benefit-analysis (CBA) of a new Dell computer with an old computer.

The estimation of Cost-benefit analysis is embedded in other key values for its prediction. For instance, NPV (Present Net Value) technique relates the present values of the policy cash outflows and inflows (Brealey et al., 2012). If the present value of the benefits exceeds or equivalents the present value of the costs, the assignment is therefore termed as economically justified. Net Present Value has the gain of comprising an essential ROR (Rate on Return) in the design. Therefore, Present Net Value amount captures the expenses linked with binding up of monetary value in the assignment. NPV unequivocally reflects on the control of the money movement in the organizational period.

The ROI (return on investment) technique purely likens the whole net benefits from the decision with the costs in total. The Rate on Investment figures provides the specific logic of monetary value generated by the decision concerning its total charge. ROI ignores any contemplation of the cash flows scheduling and the time value of money. The ROI method is defective in several means and should not be used as the only economic gauge of a decision’s prosperity (Bodie, 2013).

The break-even point is the period when the project has generated enough cash flow to recollect its costs (Corrado et al., 2012). The year in which the project breaks even is the first year in which the cumulative NPV is a positive number. The exact point during that year at which break-even occurs is calculated by (Yearly NPV (for first positive year) - Cumulative NPV at that year) per Yearly NPV (for the first positive year)

Tangible costs are organizational costs tied to a specific task or product like rent payment, supply purchases, utility bills and employee paychecks. On the contrary, intangible costs are unquantifiable expenditure such as productivity losses, employee motivation or goodwill of customers (Corrado et al., 2012).

Cost-benefit analysis justifies out the viability of an estimate through calculations over a given period. Below is an illustration of the CBA estimate on a new Dell computer with an old design.

Assumptions made:

1. If annual tuition is $30,000, then assume 10% annual computer benefit or $30,000*.10 = $3000
2. Includes email, messaging (voice & video), conferencing, and long distance expense savings
3. Includes net surfing, music, video, and gaming
4. Includes three flights annually with 4 hours of computer work during travel, personal time = $25/hr.
5. Includes savings from printing photos and maintaining hard photo albums
6. Includes postage and check savings
7. Assume will be student throughout 2014
8. Assume student loan rate is 9%, so interest rate = 9%

In conclusion, the use of new dell design proved to be effective and efficient over an old computer design in the project. The rates on investment were relatively high as a proof of the estimate. Finally, it is advisable to use a new computer for it is cost friendly.