Quantifying Benefits For Cost-Benefit Analysis

Cost Benefit Analysis is one of the most widely used financial tools to select future investment projects in public and private sector. This method is based on comparing costs and benefits in terms of constant prices. While costs are easier to predict and monetize, the benefits should be identified not only in direct relation with the investment, but also widening the sphere of analysis to indirect benefits experienced by the community from the neighbourhood or the whole society. During financial analysis, respectively economic analysis, benefits are taken into account in a different basis. While financial analysis deals with direct revenues generated by the investment project, the economic analysis integrates supplementary social benefits monetized using different methods of estimation. The quality of economic analysis is vital in accepting investment projects because economic rationality should be respected, especially positive value for NPV. The most challenging part of CBA is to monetize benefits because these are not easy to be identified, involve difficulties to be quantified and require numerous calculations and presumptions in order to associate a monetized value to each piece of benefit. Identification of benefits is a long process during which all positively affected parties should be nominated presuming that the investment project will hold added value to their life, environment or wealth. In the second stage, all benefits should be quantified exactly by comparing the “business as usual scenario with the possible state of the art after implementing the investment project. La last stage of monetisation requires the ascertainment of the value of each unit of benefit in order to calculate the monetized value of all benefits. This paper proposes to present a theoretical view regarding benefits in CBA followed by a practical part which will present possible methods of valuating the benefits in different categories of investment projects, especially in those domains where large investments are implemented frequently. A special stress is put on the calculation proposals for some frequently met benefits: reducing the number of hospital days, reducing the number of sick days for road accidents, improving quality of life through healthy life expectancy, reduce time spent in traffic, shorter flight track pending, reducing unemployment, and reduce potential damage from flooding.