---
title: "Short note: Cost-benefit analysis"
subject: "Project Engineering"
chapter: 2
key: "semester_7/project_engineering:cost-benefit-analysis-note"
source: https://www.bctengineer.com/q/semester_7/project_engineering/cost-benefit-analysis-note
site: BCT Engineering
---

# Short note: Cost-benefit analysis

Project Engineering · Chapter 2: Project Appraisal and Project Formulation

- Asked in: 2073 Shrawan, 5 marks
- Video: [Cost Benefit Analysis: Detailed explanation with Examples | Project Management Glossary by Jexo](https://www.youtube.com/watch?v=6nwEf9GGdDA) — Monday Coffee by Appfire 
- Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14
- Page: https://www.bctengineer.com/q/semester_7/project_engineering/cost-benefit-analysis-note
- Whole chapter: https://www.bctengineer.com/md/semester_7/project_engineering/chapter-2

## Question

Write a short note on cost-benefit analysis.

## Short answer

Cost-benefit analysis (CBA) compares total discounted expected benefits and costs to judge project worth. It calculates NPV, B/C ratio, and IRR; a project is acceptable if NPV>0, B/C>1, IRR>required rate. Shadow prices and social discount rate are used in social CBA to account for externalities and market imperfections.

## Answer

**Cost-benefit analysis (CBA)** compares the total expected benefits of a project with its total costs, both expressed in money and discounted to present value, to judge whether the project is worthwhile.

**Steps:** identify all costs and benefits; assign money values (using shadow prices if market prices are distorted); choose a discount rate and project life; discount; calculate indicators.

**Indicators:**
$$
B/C = \frac{PV\ \text{of benefits}}{PV\ \text{of costs}},\quad NPV = \sum \frac{B_t - C_t}{(1+r)^t}
$$

A project is accepted if $B/C > 1$, $NPV > 0$ and $IRR >$ required rate.

**Ordinary (private/financial) CBA** counts only the cash costs and benefits to the owner at market prices.
**Social CBA (SCBA)** counts all costs and benefits to society, including externalities and non-market effects, using shadow prices and a social discount rate.

**Drawbacks:** hard to give money value to intangible items (environment, human life, time); choice of discount rate affects results; forecasts are uncertain; ignores distribution of benefits among groups; externalities can be missed; costs may be underestimated and benefits overstated; not suitable alone for decisions with large social or ecological effects.

## Check yourself

The answer's key points as multiple-choice questions, with the correct option and why.

1. CBA compares benefits and costs expressed as what?
   A. Physical units without conversion
   B. Money values discounted to present value
   C. Only the first year's cash flows
   D. Undiscounted totals
   Answer: B. CBA converts all costs and benefits into money and discounts them to present value. (Key point: Definition)

2. A project is accepted under CBA when:
   A. B/C < 1 and NPV < 0
   B. B/C > 1, NPV > 0 and IRR above the required rate
   C. Only NPV is positive regardless of B/C
   D. IRR is below the required rate
   Answer: B. Accept when B/C exceeds 1, NPV is positive and IRR exceeds the required rate. (Key point: Acceptance criteria)

3. How does social CBA differ from ordinary financial CBA?
   A. It counts only owner's cash flows at market prices
   B. It counts all costs and benefits to society, including externalities, using shadow prices and a social discount rate
   C. It ignores discounting
   D. It excludes costs
   Answer: B. SCBA takes the view of society, not only the owner. (Key point: Financial vs social CBA)

4. Which is a drawback of CBA?
   A. It never depends on the discount rate
   B. Intangibles like environment and human life are hard to value
   C. It always includes distribution among groups
   D. Forecasts are certain
   Answer: B. Giving money value to intangibles is hard, and results depend on the discount rate and uncertain forecasts. (Key point: Drawbacks)

## Related in Project Engineering

- [Socio-economic survey and social cost benefit analysis](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Asocio-economic-survey-scba) — Project Engineering, chapter 2, asked 3×
- [Project proposal; cost benefit analysis for road](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Aproposal-cba-road-project) — Project Engineering, chapter 2

## Related in other subjects

- [Optimize capacity by marginal cost-benefit](https://www.bctengineer.com/question.md?key=semester_7%2Fhydropower_engineering%3Amarginal-cost-benefit-installed-capacity) — Hydropower Engineering, chapter 3
- [Safety risk-benefit analysis; dispute resolution](https://www.bctengineer.com/question.md?key=semester_8%2Fengineering_professional_practice%3Asafety-risk-benefit-conflict-resolution) — Engineering Professional Practice, chapter 6
- [Cost variance analysis from standard and actual](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Acost-variance-analysis-9000-units) — Engineering Economics, chapter 1
- [IRR with varying benefit and O&M; unrecovered balance](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Airr-500000-unrecovered-balance) — Engineering Economics, chapter 3