Cost-benefit analysis communicates the value of public investments in a way most stakeholders and citizens understand. McDavid and Hawthorn (2006) describe cost-benefit analysis as an "elegant bottom line" for programs and projects. Here is an overview of how to do a simple cost-benefit analysis, including some practical ideas to consider:
- Estimate and/or track program costs
- Estimate and/or track program benefits
- Calculate return on investment (ROI)
There are various ways to track program costs. Sometimes, tracking program costs is not possible, and you have to make an expert estimation. If you are estimating, remember to say so in reporting the results, as in. "This cost-benefit analysis is based on an estimation of costs and benefits by program staff and advisory leaders."
As a starting point, calculate four cost categories: staff salaries, staff benefits, operating expenditures and equipment. The staff may not spend 100% of their time on a given program, so their salaries may need to be pro-rated
based on the amount of time spent on the project.
For many programs that build human and social capital, this is the hard part. You have to monetize the program benefits. Think about the program benefits in terms of four categories: reduced costs to participants or to society, increased income to your participants or firm, increased productivity, and savings.
Return on investment:
The formula is benefits minus cost of investment divided by cost of investment:
(Benefits – Cost of Investment)/Cost of Investment
Here is an example. If the benefits of a program are estimated at $353,774 and the costs are estimated at $60,182, then the formula looks like this:
($353,774 – $60,182)/$60,182 = 4.87
The result is $4.87, so for every $1 invested in the program, it returned $4.87.
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