Assuming you got through the rough stuff of defining costs and
benefits, the analysis should be simple. What you want to know is if
the benefits of the project will exceed the costs, and by how much.
Since costs and benefits may be spread over long periods of time,
Present Values of these amounts are also usually calculated to compare
the amounts in “today’s” dollars.
When I did my first Cost-Benefit Analysis for a major project, I had
to work with an spreadsheet expert to to do these calculations; now you
can probably download something for free or a nominal fee that will do
basic and advanced calculations. The key things these tools need is the
two dollar values, cost and benefit, and the length of time of the
analysis. The latter is usually defined by accounting standards at your
company, and the most popular time periods used are three years and
five years, often based around your company’s depreciation
procedures/periods.
Given that, you can usually get calculations like:
• Break-Even Point, the point in time when the benefits realized exceed the project cost
• Various rate of return and yield values, like IRR.
These calculations may be used to determine if a project passes a
funding hurdle; its not enough that a project makes money, but it has
to make more than investing the equivalent dollars of the project cost
in securities or other investments.
After all this is done, a project can now proceed into the gating
process to see if it has enough expected value to warrant its being
initiated and carried out. Of course, if your analysis has determined
already that the project does not have positive return or does not
surpass the hurdle rate, you can stop now and move onto the next
project idea. Determining that a project is not good for the business
is just as valuable as finding those projects that are good for the
business. Resources should not be wasted.
