Here we’ll determine net present values by subtracting costs from benefits, and project the timeframe required for benefits to repay costs, also known as return on investment (ROI).

The process doesn’t end there. In certain situations, it’s important to address any serious concerns that could impact feasibility from a legal or social justice standpoint. In cases like these, it can be helpful to incorporate a “with/without” comparison to identify areas of potential concern.

With/Without Comparison The impact of an initiative can be brought into sharp focus through a basic “with/without” comparison. In other words, this is where we look at what the impact would be-on organizations, stakeholders, or users-both with, and without, this initiative.

Thayer Watkins, who taught a course on cost benefit analysis during his 30-year career as a professor in the San Jose State University Department of Economics, offers this example of a “with/without” comparison:

“The impact of a project is the difference between what the situation in the study area would be with and without the project. So that when a project is being evaluated the analysis must estimate not only what the situation would be with the project but also what it would be without the project. In other words, the alternative to the project must be explicitly specified and considered in the evaluation of the project.”

In the home stretch of the cost benefit analysis, you’ll be looking at the results of your work and forming the basis to make your decision.

1. Perform Sensitivity Analysis Dr. “Information on costs, benefits, and risks is rarely known with certainty, especially when one looks to the future,” Dr. Kaplan says. “This makes it essential that sensitivity analysis is carried out, testing the robustness of the CBA result to changes in some of the key numbers.”

EXAMPLE of Sensitivity Analysis In trying to understand how customer traffic impacts sales in Bob’s Pie Shop, in which sales are a function of both price and volume of transactions, let’s look at some sales figures:

Bob has determined that a 10% increase in store traffic will boost his pie sales by 5%. This allows Bob to build the following sensitivity analysis, based upon his sales of 400 pies last year, that demonstrates that his pie sales are significantly impacted by fluctuations or growth in store traffic:

2. Consider Discount Rates When evaluating your findings, it’s important to take discount rates into consideration when determining project feasibility.

Kaplan recommends performing a sensitivity analysis (also known as a “what-if”) to predict outcomes and check accuracy in the face of a collection of variables

• Social discount rates – Used to determine the value to funds spent on government projects (education, transportation, etc.)
• Hurdle rates – The minimum return on investment required by investors or stakeholders
• Annual effective discount rates – Based on a percentage of the end-of-year balance, the amount of interest paid or earned

3. Use Discount Rates to Determine Course of Action After determining the appropriate discount rate, look at the change in results as you both increase and decrease the rate:

Kaplan recommends performing a sensitivity analysis (also known as a “what-if”) to predict outcomes and check accuracy in the face of a collection of variables

• Positive – If both increasing and decreasing the rate yields a positive result, the policy or initiative is financially viable.
• Negative – If both increasing and decreasing the rate yields a negative result, revisit your calculations based upon adjusting to a zero-balance point, and evaluate using the new findings.

Despite its usefulness, cost benefit analysis has several associated risks and uncertainties that are important to note. These risks and uncertainties can result from human agendas, inaccuracies around data utilized, and the use of heuristics to reach conclusions.