SOMEONE HELP PLEASE!!!: Comparing Cost Benefit Analysis to Cost-Effectiveness An
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Question
SOMEONE HELP PLEASE!!!:
Comparing Cost Benefit Analysis to Cost-Effectiveness Analysis? To illustrate, CBA applies when you are deciding what mode of transportation you will use on a day to day basis, assuming that walking is not always a feasible option. Your choices include public transportation, bicycle, motorcycle, car, van, truck, or SUV. You are most likely to choose the option you believe offers the most benefits (including personal matters like self-perception of prestige among peers) at a cost you find acceptable.
Let’s assume you chose to buy a car. After a year or so, the alternator goes out. Not wishing to revisit the major question of which mode of transportation to adopt, you accept that the most reasonable course is to repair the car. Your choices are to have the alternator rebuilt for $200 with a one-year warranty or buy a new alternator for $500 with a five-year warranty. You intend to keep the car for only another year at most, so you choose to have the alternator rebuilt. This is cost-effectiveness analysis.
Does this example make the difference between CBA and CEA clear?
Explanation / Answer
Both cost -benefit analysis(CBA) and cost effectiveness analysis(CEA) are decision tools to help management towards cost-cutting and optimisation of resource-usefulness.Both are useful when the resources are limited.
CBA is a very systematic study of all the benefits and all the costs (or pros and cons) of different alternatives available , for a common objective or goal- to arrive at the most profitable/economically feasible alternative. CBA involves mostly money considerations ,But sometimes non-monetary cosiderations are also involved.
CEA establishes the effective utilisation of costs incurred while achieving the above said goal. But cost effectiveness is measured in terms of some non-monetary consideration like time in years.It uses money to aid in time-framed cost-cutting measures. Costs of different couses for a particular action are measured against some qualitative denominator.
The above example does bring out very clearly, the essence of CBA & CEA and the minute difference between the two.
As the former-ie. CBA analyses different altrenatives -ie. modes of transport before deciding on the choice,that is car.. To this end, costs and benefits associated with each alternative are thought out and analysed thread-bare . Here, some amount of non-monetary considerations like prestige and peer pressure are also analysed.CBA analyses net benefits of different alternatives that come to your mind, given your requirements and money at your disposal.
After having chosen the alternative of car, CEA helps to decide the best course of action , given the time constraint ie. as the car is to be retained for one more year only, it is prudent to spend as much as is required under the circumstances, ie. to buy an alternator with one year warranty, that is just adequate for the purpose.It is certainly not prudent to go in for a 5-year alternator for a 1-year car. Here, no.of years of your future use of the car -is the denominator for decision-making. That money can be put to someother use of yours.
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