Meaning of Cost-benefit
What is Cost-benefit:
The cost-benefit ratio is a financial tool that compares the cost of a product versus the benefit it provides to effectively evaluate the best decision to make in terms of purchase.
The cost-benefit analysis of a project, for example, is constituted by a set of procedures that provide the profitability measures of the project by comparing the expected costs with the expected benefits when carrying it out.
In economics, to calculate if the cost-benefit balance is balanced, the following steps and formulas are used:
- The monetary value of the costs and benefits for the implementation of the system is defined.
- Costs and benefits are converted to present value.
- The cost-benefit ratio (C / B) is found, which is equal to the total net income divided by the total costs:
- If the analysis of the C / B ratio is greater than 1 it means that it is profitable, while if it is equal to or less than 1 it indicates that it is not profitable.
- The result is taken and compared with other projects.
- The project with the highest index in the relationship is chosen.
For a cost-benefit analysis, you must have knowledge of the market, the needs and requirements of the project, and the resources available for its application before calculating its effectiveness.