Cost-benefit analysis

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Cost-benefit analysis is the process of weighing the total expected costs vs. the total expected benefits of one or more actions in order to choose the best or most profitable option.

Often, this involves monetary calculations of initial expense vs. expected return. For example, a product manager may compare manufacturing and marketing expenses to projected sales for a proposed product, and only decide to produce it if he expects the revenues to eventually recoup the costs.

During cost-benefit analysis, monetary values may also be assigned to less tangible effects such as risk, loss of reputation, market penetration, long-term strategy alignment, etc. This is especially true when governments use the technique, for instance to decide whether to introduce business regulation, build a new road or offer a new drug on the state healthcare. In this case, a value must be put on human life or the environment, often causing great controversy.

Cost-benefit calculations typically involve using time value of money formula. This is usually done by converting the future expected streams of costs and benefits to a present value amount.

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