I’ll be writing a series of posts on Cost/Benefit Analysis.
First the Government line: baseline excerpts from government hosted publications regarding cost/benefit analysis, and links back to the publication.
…A program is cost-effective if, on the basis of life cycle cost analysis of competing alternatives, it is determined to have the lowest costs expressed in present value terms for a given amount of benefits.
…Cost-effectiveness analysis can also be used to compare programs with identical costs but differing benefits. In this case, the decision criterion is the discounted present value of benefits. The alternative program with the largest benefits would normally be favored.
…Analyses should include comprehensive estimates of the expected benefits and costs to society based on established definitions and practices for program and policy evaluation. Social net benefits, and not the benefits and costs to the Federal Government, should be the basis for evaluating government programs or policies that have effects on private citizens or other levels of government.
…Calculation of net present value should be based on incremental benefits and costs. Sunk costs and realized benefits should be ignored.
…Some Federal activities provide a mix of both Federal cost savings and external social benefits. For example, Federal investments in information technology can produce Federal savings in the form of lower administrative costs and external social benefits in the form of faster claims processing.
…Because taxes generally distort relative prices, they impose a burden in excess of the revenues they raise. Recent studies of the U.S. tax system suggest a range of values for the marginal excess burden, of which a reasonable estimate is 25 cents per dollar of revenue…(Therefore,) costs in the form of public expenditures should be multiplied by a factor of 1.25.
Department of Health and Human Services, Administration for Children and Families and Health Care Finance Administration Feasibility, Alternatives, And Cost/Benefit Analysis Guide:
Benefit/Cost Ratio is calculated for the status quo and each alternative by dividing the total present value benefits by the total present value costs. Where benefits equal costs, the ratio will be 1. For benefits exceeding costs, the ratio will be more than 1, again preferable. In fact, the larger the number (within reason), the more attractive the alternative. On the other hand, where costs exceed benefits, the ratio will be less than 1. Breakeven will not be reached.