In the best case, cost-benefit analysis (CBA) is a system of strategic analysis used by businesses in order to make the best possible decisions. A correct cost-benefit analyst adds the potential rewards expected from a situation or action and then subtracts the total costs associated with taking that action. A business may also build models in order to assign a dollar value to intangible items, such as the benefits and costs associated with operating in a certain city.
Before occupying a new space, taking on a new project, or launching a new product, any prudent business should conduct a cost-benefit analysis so that they can examine all the potential costs and profits that a company might generate from the project. The outcome of the analysis will determine whether this way forward is economically feasible or if the business should abandon it in favor of other projects with more potential. A thorough CBA analysis will also factor in opportunity costs. Opportunity costs are defined as the alternative benefits that could have been realized if the company had gone in another direction. Essentially, the opportunity cost is the forgone or missed profit as a result of the path not taken. By factoring in opportunity costs, project managers can weigh the benefits from alternative courses of action and thus get the full picture of what would be gained or lost.
The results of weighing the costs and benefits should be examined quantitatively to determine whether or not the benefits outweigh the costs. If so, then the logical way forward is to move ahead with the project or product. But if not, then the business should probably revise the project to see if adjustments can be made to increase profitability or cut costs. Otherwise, they should most likely avoid taking the next step. For very large projects with a years-long time horizon, a CBA could easily fail to account for important financial concerns such as inflation, interest rates, and the present value of money.
Of course, the process of doing a CBA itself will have its own costs and benefits. Costs could involve the time needed to carefully analyze and estimate the potential rewards and costs. Costs may also involve large sums of money paid to an analyst or consultant to do the large amounts of work in question.