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<p>a. Cost only.</p> <p>b. Benefit Only.</p> <p>c. None of the above.</p> <p>d. Both a and b </p>
D. both
Main Stages in the Cost Benefit Analysis Approach
At the heart of any investment appraisal decision is this basic question – does a planned project lead to a net increase in social welfare?
Stage1(a) Calculation of social costs & social benefits. This would include calculation of:
Tangible Benefits and Costs (i.e. direct costs and benefits)
Intangible Benefits and Costs (i.e. indirect costs and benefits – externalities)
This process is very important – it involves trying to identify all of the significant costs & benefits
Stage1(b) - Sensitivity analysis of events occurring – this relates to an important question - If you estimate that a possible benefit (or cost) is £x million, how likely is that outcome? If you are reasonably sure that a benefit or cost will ‘occur’ – what is the scale of uncertainty about the actual values of the costs and benefits?
Stage2: - Discounting the future value of benefits - costs and benefits accrue over time. Individuals normally prefer to enjoy the benefits now rather than later – so the value of future benefits has to be discounted
Stage3: - Comparing the costs and benefits to determine the net social rate of return
Stage4: - Comparing net rate of return from different projects – the government may have limited funds at its disposal and therefore faces a choice about which projects should be given the go-ahead
Both items to be considered
