Discuss briefly the treatment of external cost and benefits in investment decisions
Answers
Cost-benefit analysis CBA or benefit costs analysis BCA is a systematic approach used to estimate the strengths and weaknesses of alternatives. It is a systematic process for calculating and comparing the benefits and costs of a project, policy or decision.
The purposes of CBA are:
1. To determine if an investment is sound. It is used to verify whether the benefits outweigh the costs, and by how much.
2. To provide a basis for comparing projects. It involves a comparison of the total expected cost of each option against its total expected benefits.
The benefits and costs are expressed in monetary terms. They are adjusted for the time value of money. All the flows of benefits and costs over time are expressed on a common basis as their net present value.