In business today, it is best practice to take advantage of all the alternatives and options available. To achieve this, numerous associations from huge ventures to new companies and private ventures, use cost benefit analysis to settle on significant choices. Using these 2 Cost Benefit Analysis Examples, teams can distinguish among the most trust worthy and best profit for a venture dependent on the cost, assets, and risk included.
So what is the cost benefit analysis?
Cost Benefit Analysis is one of the techniques used in feasibility study phase of the software project management. In this technique, we evaluate the cost versus benefits in project proposal. There is a list of expenses of every project and the expected benefits after successfully completing the project. Here you can calculate return on investment (ROI), internal rate of return (IRR), net present value (NPV) and the payback period
And what is the purpose of this cost benefit analysis?
The purpose of cost benefit analysis in the project management is to analyse the pros and cons of various key points including transaction, different tasks, software requirements and investments. In short, Cost Benefit Analysis gives you the best approach to achieve your goals in least possible investment.
Process or Steps for a Cost Benefit Analysis
1) Pen Down Costs and Benefits
Firstly, write all the costs and benefits of the project that comes in your mind. After that, estimate the duration of the project.
2) Assign a Monetary Value to the Costs
Costs include physical resources costs, HR costs, furniture, rent, utilities, licensed software, work stations and all the stuff required to complete the project.
It is very important to think of as many costs as you can. Let say if you need to provide training to your developers or you need to outsource a module. In short, each and every cost will affect your project CBA.
You also have to think about costs that will add continuously, once the project is finished. For example, consider whether you will need additional staff, if your previous team need more training.
3) Assign a Monetary Value to the Benefits
When you have two arrangements of costs and benefits for the activity, allot monetary values to every individual cost or benefit. However, it is very important to assign monetary values to tangible and intangible benefits. For example, if you need to update any employee’s PC and it take several hours to accomplish. That particular time period will have negative effect on company as well as employee because there is no productivity.
4) Compare Costs and Benefits
Take the sum of the revenue(benefits) and the sum of the costs. After taking sum put the resulting value in the equation.
Sum of cost / Sum of revenue(benefits) = time duration (payback period).
The equation should be a numerical equation, and if the numerical benefits exceeds the costs, it is suggested to proceed with the decision. If not, the company or individual should re-examine the potential action and make adjustments accordingly.
EXAMPLE 1
A well-established small-scale software house is meeting its client’s demand for first day. Initially, two developers are working and now CEO is thinking to add one QA analyst and a business analyst to generate more revenue and enhance its business. Moreover, new team members also need some space to work. He decides to do a Cost Benefit Analysis to explore his choices.
Assumptions
- Currently, the owner of the company has more work than his resources, and he is outsourcing to other software houses at a cost of $50 an hour. The company outsources an average of 100 hours of work each month.
- He estimates that revenue will increase by 50% with increased capacity.
- Per-person revenue will increase by 10 percent with more working space.
- He expects to generate more revenue within 1 year.
Let's take a look at the Costs:
Now for the Benefits:
Payback time period can be calculated by putting the values in the equation as shown below:
$127,000 / $290,500 = 0.43 of a year, or approximately 5.3 months.
The estimates of the advantages are abstract, and there is a level of vulnerability related with the foreseen income increment. In spite of this, the CEO of software house chooses to proceed with the extension and employing, given the degree to which the advantages exceed the expenses in the primary year.
Example 2 Cost Benefit Analysis
Digital Brains (a software company) is operating for three years and CEO is planning to deliver projects faster to meet the demands of the clients. Currently,5 programmers are working full time but you need 1 designer, 1 Tester and 1 developer more to meet the demands. Hiring three more members require additional investments such as buying additional furniture, computers and leasing additional workspace.
Assumptions
- Revenue is $150,000 per year but it will increase by 30% as the capacity increases.
- Every month you are outsourcing an average of 100 hours of work with a cost of $80 per hour to another software company for testing.
- Productivity of team members will increase by 5% with more comfortable office environment.
Let's have a look at the Costs:
Payback time period can be calculated by putting the values in the equation as shown below:
$216,000 / $228,000 = 0.947 of a year, or approximately 11.5 months.
It is frequently hard to evaluate the advantages/revenue as compared to costs. Since benefits are abstract and can be influenced. Moreover, as a dynamic tool in software project management, CBA frequently manages to choose the best other option. We can say that employees will be benefited while working in this organization as known through cost benefit analysis results.
ADVANTAGES OF USING COST BENEFIT ANALYSIS
Cost benefit analysis has several tangible and intangible advantages resulted from the above two examples such as:
- It helps you to select a project when you are confused.
- It helps us to compare the costs invested and possible generated revenues.
- It serves as a benchmark to select the best possible option.
- It compares the future profit with current currency value.
- It helps to select the most profitable project.
- It reduces the chances of failure and risk to the maximum extent.
- Statistical data helps in employees’ satisfaction.
- Help to invest in the correct place.
- It serves as a good gesture and more positive energy to expand the organization.
SUMMARY
The cost benefit analysis technique is a precise way to deal with investment cost and received benefits. You can utilize this when you need to choose a project among numerous alternatives. This procedure likewise encourages you when making new move, yet turns out to be progressively troublesome as the span of the project or cost increases, this method turns out to be more difficult.
You can also look for a template here for Cost Benefit Analysis
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