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
Cost-Benefit Analysis:
Cost-benefit analysis, which is sometimes called benefit-cost analysis, is a systematic approach to gauging the economic worth of a project or investment. Cost-benefit analysis does this by quantifying in monetary terms the costs of a project and comparing them with the benefits, also expressed in monetary figures, according to the Economics Department at San Jose State University in California. If the value of the benefits exceeds that of the costs, the project is considered worthwhile. This method of analysis can be applied to such projects as building a new manufacturing facility or upgrading factory equipment to increase productivity.
Cost-Effectiveness Analysis:
Like cost-benefit analysis, the cost-effectiveness approach calculates the monetary value of all project costs. The difference is that cost-effectiveness considers the outputs produced by a project, which are not measured in monetary terms, according to the Centers for Disease Control and Prevention. Health-care research often uses cost-effectiveness analysis to analyze the cost of health-care interventions in terms of lives saved, illnesses prevented or years of life gained. The resulting measure in cost-effectiveness analysis, then, is the cost per case prevented or cost per year of life gained, according to the CDC.
Significance
The key to distinguishing a cost-benefit from a cost-effectiveness analysis is to examine the units of measurement used in the analysis. Cost-benefit relies on a common measure, with costs and benefits expressed in monetary units. If the costs and outcomes of a program are expressed in dollars, for example, the analysis is a cost-benefit. Cost-effectiveness analysis measures project results in units rather than monetary figures. For example, a cost-effectiveness analysis of a company wellness program might study the program in terms of its costs versus the reduction in sick days taken by employees. A cost-benefit analysis of the same program could measure benefits as the money the company saved in reduced sick days.
Considerations:
Another difference between these types of analysis involves the types of projects studied. Business analysts and managers generally apply cost-benefit analyses to projects that are more technical or industrial, because it is easier to place monetary values on benefits as well as costs. Training and personnel programs, meanwhile, lend themselves more to cost-effectiveness because of the difficulty in placing dollar values on human outcomes.
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