Cost-benefit analysis
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Cost-benefit analysis is the process of weighing the total expected costs vs. the total expected benefits of one or more actions in order to choose the most profitable option.
Often, this involves monetary calculations of initial expense vs. expected return. For example, a product manager may compare manufacturing and marketing expenses to projected sales for a proposed product, and only decide to produce it if he expects the revenues to eventually recoup the costs.
During cost-benefit analysis, monetary values may also be assigned to less tangible effects such as risk, loss of reputation, market penetration, long-term strategy alignment, etc.
Cost-benefit calculations typically involve using time value of money formuli. This is usually done by converting the future expected streams of costs and benefits to a present value amount.
See also:
- Kaldor-Hicks efficiency - economic principle underlying cost-benefit analysis
- Pareto efficiency - alternative economic principle
- Net present value - a similar type of calculation