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## Examples of Cost-Benefit Analysis

The following examples of Cost-Benefit analysis provide an understanding of the various types of areas where Cost-Benefit analysis can be conducted by an organization. The cost-benefit analysis is conducted by the managers of the company before selecting any new plant project in order to evaluate all potential benefits (revenue) and costs that the company may generate if it undertakes and complete the project as the outcome of analysis will help in determining whether it is financially feasible for the company to start the analyzed project or not.

### Cost-Benefit Analysis – Example #1

**Financial analysis International Ltd is planning to undertake one project. It has two alternatives with the following benefits and costs.**

Given,

**Alternative 1**

- The total value of the Costs from project 1 = $ 60 million
- Benefits available from project 1 = $ 100 million

**Alternative 2**

- The total value of the Costs from project 2 = $ 10 million
- Benefits available from project 2 = $ 21 million

Using the Cost-benefit analysis, which Project the company should choose?

**Solution**

In order to decide which project the company should opt using the cost-benefit analysis, the benefit-cost ratio will be calculated for both of the projects.

**Benefit-Cost Ratio = Benefits available from the project / Total value of the Costs**

**Alternative 1**

The benefit-cost ratio can be calculated as,

= $ 100 million / $ 60 million

**Benefit-Cost Ratio = 1.667**

**Alternative 2**

The benefit-cost ratio can be calculated as,

= $ 21 million / $ 10 million

**Benefit-Cost Ratio = 2.1**

**Analysis:** Being both the projects have positive outcomes, both of the projects are beneficial for the company i.e., the company will be in profit if it undertakes any of the projects. However as the company has to choose one out of two, the project with a higher benefit-cost ratio will be selected. In the present case, project 2 has a higher benefit-cost ratio so as per Cost-benefit analysis project 2 will be selected by financial analysis International Ltd

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### Cost-Benefit Analysis – Example #2

**Sports International limited is planning to expand its business and for that, it will require four new employees in the organization. In order to analyze whether the expansion is beneficial or not, the management of the company decides to use the cost-benefit analysis. The following are the information available related to benefits and costs related to expansion:**

- Within the time frame of one year, it is expected that if the company hires four employees for the expansion then the revenue of the company will increase by 50 % i.e., the revenue benefit will be around $ 250,000.
- Along with this due to the new hiring company value of the business will increase which would result in additional revenue of $ 30,000.
- The salary of the new employees is estimated to be $ 160,000.
- The additional cost of hiring is estimated to be $ 15,000.
- The cost of additional hardware and software required will come at around $ 25,000

Analyze the expansion using Cost-benefit analysis.

**Solution**

- Total benefit from the project = Increase in revenue from expansion
- Total benefit from the project = $ 250,000 + $ 30,000 = $ 280,000
- Total Cost from expansion = Salary of new employees + Cost of hiring + Cost of additional hardware and software
- Total Cost from expansion = $ 160,000 + $15,000 + $25,000
- Total Cost from expansion = $ 200,000

Now benefit-cost ratio will be calculated for the expansion.

= $280,000 / $ 200,000

**Benefit-Cost Ratio = 1.40**

As the expansion has a positive benefit-cost ratio (the total benefits due to expansion is greater than total cost) the company should go ahead with the expansion of the project and hire new employees as that will be beneficial for the company.

### Cost-Benefit Analysis – Example #3

**Constru Ltd is a real estate developer. It is planning to make the investment for which it came across different investment options. The following are the information available related to benefits and costs related to different investment options:**

**Option 1**

Build 200 flats out of which 100 flats will be given on the rent for the period of 10 years at the rent of $ 2,000 per year. After the period of 10 years, the rented 100 flats would be sold out at the price of $ 100,000

On the cost side, the cost of construction would come to $ 110,000 per flat which can be sold at $150,000 each. Apart from the construction cost, the cost of sales and staff would come to $ 700,000 per year. The financing cost of the project would be $1,500,000 and the project would last for 2 years.

**Option 2**

Build 100 flats out of which 20 flats will be given on the rent for the period of 5 years at the rent of $ 3,000 per year. After the period of 5 years, the rented 20 flats would be sold out at the price of $ 120,000

On the cost side, the cost of construction would come to $ 150,000 per flat which can be sold at $200,000 each. Apart from the construction cost, the cost of sales and staff would come to $ 450,000 per year. The financing cost of the project would be $4,000,000 and the project would last for 1 year.

Analyze the investment options using Cost-benefit analysis.

**Solution**

**Option 1**

The benefit-cost ratio can be calculated as,

= 27000000 / 26400000

**Benefit-Cost Ratio = 1.02**

**Option 2**

The benefit-cost ratio can be calculated as,

= 18700000 / 17900000

**Benefit-Cost Ratio = 1.04**

It is seen the Benefit-cost ratio of option 1 is 1.02 and of option 2 is 1.04. When both the options are compared it can be seen that option 2 has a higher benefit to cost ratio and therefore the company should it over option 1.

### Conclusion

The cost-benefit Analysis evaluation method is thus used to identify the effective options available by the company and make the best choices out of them, which should prove both advantageous and costs saver to the company. So, the managers of the company before selecting an alternative for the new plant or project should conduct cost-benefit analysis so that they can judge the financial feasibility of the project in the proper manner.

### Recommended Articles

This has been a guide to Cost-Benefit Analysis Examples. Here we provide you the top 3 examples of Cost-Benefit Analysis along with a detailed explanation. You may learn more about Financial Modeling from the following articles –

- Examples of Feasibility Study
- Top Limitations for Analysis of Financial Statement
- Flotation Cost Formulas
- Top 4 Examples of Financial Statement Analysis
- Corporate Finance vs Project Finance – Compare
- Internal Rate of Return
- NPV Profile Meaning
- What is Absorption Costing?

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