Cost benefit analysis is used to assess that whether a project generates benefits more than costs associated with it. Before spending anything on a project the cost and benefit analysis is very important. If the costs outweigh the benefits then the project should not be started. On the other hand, if the benefits outweigh the costs the project can be started.
Assume a bakery owner can rent an oven for $500 per month or purchase a new oven for $2500 that will be useful for 8 years. If the oven is rented, no maintenance costs will occur. If purchased the baker has to spend an extra $100 each month. Either way, the baker is confident that the annual revenue will be $600.
|
|
Rental |
Revenues |
Net benefit |
Purchase |
Revenues |
Net benefit |
|
Year 0 |
0 |
|
0 |
-2500 |
|
-2500 |
|
Year 1 |
-500 |
600 |
100 |
-100 |
600 |
500 |
|
Year 2 |
-500 |
600 |
100 |
-100 |
600 |
500 |
|
Year 3 |
-500 |
600 |
100 |
-100 |
600 |
500 |
|
Year 4 |
-500 |
600 |
100 |
-100 |
600 |
500 |
|
Year 5 |
-500 |
600 |
100 |
-100 |
600 |
500 |
|
Year 6 |
-500 |
600 |
100 |
-100 |
600 |
500 |
|
Year 7 |
-500 |
600 |
100 |
-100 |
600 |
500 |
|
Year 8 |
-500 |
600 |
100 |
-100 |
600 |
500 |
|
NET BENEFIT |
|
|
800 |
|
|
1500 |
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