Conducting a Simple Cost Benefit Analysis Example for a project

In this article, you will find every ins and outs of cost benefit analysis with a project of nursery. By reading this article, you will know about Conducting a Cost-Benefit Analysis for an Assumed Project to Decide Whether the Project is Profitable or Not?

What is a cost benefit analysis:

A cost benefit analysis is nothing but process of comparing costs and benefits of a project. A cost benefit analysis determines whether a project makes sense from a business perspective or not. Cost-benefit analysis process includes tallying up all costs of an environmental project or decision and subtracting that cost from the total projected benefits gets from the environmental project or decision.
If the projected benefits more than the costs, one can claim that the decision is a good one to make and the project can be run. On the other hand, the costs are more than the benefits, then a company may want to rethink the decision or project will be run or not. To conduct a simple cost benefit analysis establishment of a framework, identifications of cost and benefits, total value from the comparison of cost and benefits etc. are analyzed in details. In this study I have considered an imaginary plant nursery project of 10 years duration for which cost-benefit analysis has been done. The nursery will produce seedlings as well as sell nursery inputs.

Simple cost benefit analysis formula:

The following formulae were used to calculate the discounted values of costs and benefits:

Total discounted cost = C₀+ C₁/(1+i)+ C₂/(1+i)²+…..+C₅/(1+i)⁵

Total discounted benefits = B₀+ B₁/(1+i)+ B₂/(1+i)²+…..+ B₅/(1+i)⁵

Where C₀, C₁, …. C₅ are costs incurred in year 0, 1, …., 5

and B₀, B₁, …. B₇ are benefits received in year 0,1,…, 7 at a discount rate of i percent.

List of Probable Cost Sectors for a simple cost benefit analysis project:

Production Cost for a simple cost benefit analysis project:

• Land Lease
• Seed
• Seedling
• Polythene
• Fertilizer and Pesticide
• Net and Bamboo
• Carriage inward (transportation cost for carrying materials from vendors)
• Labor  Pump, water tank and associated water supply network
• Electricity Bill
• Stock Loss
• Provision (loss due to seedling mortality)
• Pot and Plastic Tray
• Soil
• Others

Operational Cost for simple cost benefit analysis project:

• Salary and Benefits
• Stationeries, Supplies and Utilities
• General Expenses and Maintenance

 

List of Probable Benefits from simple cost benefit analysis project:

• Fruit Seedling
• Forest Seedling
• Medicinal Seedling
• Spices Seedling
• Seasonal Seedling
• Ornamental Seedling
• Revenue From Selling Nursery Inputs (such as earthen pot, spray machine of different sizes, secateurs, pruning knife, soil and fertilizer etc. for home and commercial gardening)

Production Cost for  a simple cost benefit analysis of a project (establishing the plant nursery)

Year	Land Lease	Seed	Seedlings	Polythene	Fertilizer and Pesticides	Net & Bamboo	Carriage inward	Labour	Pump and water network	Electricity Bill	Stock Loss Provision	Plot & Plastic Tray	Soil	Others
1	50000	5000	100000	10000	50000	50000	10000	150000	80000	3600	10000	50000	10000	5000
2	50000	5000	110000	10000	50000	5000	7000	150000	0	3600	8000	50000	8000	5000
3	50000	5500	80000	9500	60000	5000	6000	150000	0	3600	8000	60000	7000	5000
4	55000	6000	65000	9500	60000	8000	6000	160000	0	4500	7000	60000	6000	5000
5	55000	7000	40000	9000	70000	6000	5000	160000	0	4500	6000	60000	4000	5000
6	58000	7000	30000	8500	70000	5000	5000	170000	0	4500	6000	62000	4000	5000
7	58000	7500	30000	8500	70000	5000	5000	170000	0	5000	5000	64000	4000	5000
8	60000	7500	30000	8000	70000	5000	4000	170000	0	5000	5000	63000	4000	5000
9	60000	8000	30000	8000	70000	5000	4000	180000	0	5200	5000	65000	4000	5000
10	60000	8000	30000	7500	70000	80000	4000	180000	0	5500	45000	65000	4000	5000

 

Operational Cost for a simple cost benefit analysis of a project (establishing the plant nursery)

 

Year	Salary & Benefits	Stationeries, Supplies & Utilities	General Expenses & Maintenance	Advertisement
1	100000	30000	70000	8000
2	100000	30000	70000	5000
3	110000	30000	70000	3000
4	110000	30000	70000	0
5	120000	30000	70000	0
6	120000	30000	70000	0
7	120000	30000	70000	0
8	140000	30000	70000	0
9	140000	30000	70000	0
10	150000	30000	70000	0

 

Benefits from a simple cost benefit analysis of a project (establishing the plant nursery) 

Probable benefits from nursury	Fruits seedling	Forest seedling	Medicinal seedling	Spices Seedling	Seasonal flowers	Ornamental plants	Nursery inputs
1	180000	100000	80000	100000	90000	50000	90000
2	180000	100000	100000	100000	90000	50000	80000
3	190000	140000	120000	110000	80000	110000	80000
4	190000	150000	140000	140000	100000	110000	100000
5	190000	170000	150000	150000	110000	130000	120000
6	190000	190000	170000	160000	120000	150000	130000
7	200000	250000	180000	160000	130000	150000	150000
8	200000	300000	190000	170000	130000	160000	180000
9	250000	350000	190000	190000	150000	180000	200000
10	250000	380000	200000	190000	160000	190000	220000

 

Calculation for a simple Cost Benefit analysis project:

Calculating Discounted Cost and Discounted Benefits

Year	Total Benefits	Discounted Benefit (Tk.) R=9%	Total	Discounted Cost (Tk.) R=9%
1	690000	627900	791600	720356
2	700000	637000	666600	606606
3	830000	755300	662600	602966
4	930000	846300	657000	597870
5	1020000	928200	646500	588315
6	1110000	1010100	647000	588770
7	1220000	1110200	649000	590590
8	1330000	1210300	666500	606515
9	1510000	1374100	679200	618072
10	1590000	1446900	804000	731640
Total	10930000	9946300	6870000	6251700

Cost Benefits Ratio:

BCR= Total Discounted Benefit / Total Discounted Cost

=9946300/6251700

=1.5909

=1.6

The result of BCR is 1.6 which indicates the current discounting rate the plant nursery project will be a very much profitable one.

 

Conclusion:

Cost-Benefit analysis or CBA is a process or tool to support decision making in projects.  The imaginary nursery project gives an idea how CBA can put numerical insights in decision making. CBA is a necessary for every project that indicates the project will be profitable or not. Government should imply it in every sensitive project especially project related to natural environment.

I think after reading this article properly you can understand every ins and outs of the cost benefit analysis. Still you have any confusion, please free to leave a comment here.