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Economic evaluationMonetary valuationNPVPublic investmentWTPDiscount rate

Cost-Benefit Analysis

Cost-Benefit Analysis
Also known as: CBA、Cost-benefit analysis、Benefit–cost analysis

A method for comparing alternatives' costs and benefits in a common monetary unit. Align the analytical perspective and period, and report present values alongside impacts that cannot be monetized. [1]

Cost-benefit analysis identification worksheet — openReferences and checked sections
Difficulty
Advanced
Cost
High
Duration
Planning example, not a universal standard duration: 2–6 months when benefit measurement and data collection are included
Content updated: 2026-10-07Source checked: 2026-09-13 (includes AI cross-checking)No documented human reviewIncludes fictional examples

How it works at a glance

Define comparators, such as doing nothing or usual practice, and identify additional resource costs and benefits. Convert values over multiple years to the same point in time using a discount rate and price basis appropriate to the applicable system. [1]

Net present value is the present value of benefits minus the present value of costs. Do not choose solely by the benefit–cost ratio: consider scale, budget, distribution, impacts difficult to monetize, and results under different assumptions. [1]

BenefitsTime saved, health, income gains…CostInvestment, operating and opportunity costs…Discount all future values to present value before comparing themNPV = benefits − costs > 0 / B/C ratio > 1
Compare monetized benefits and costs at present value. Alongside NPV and the benefit–cost ratio, consider impacts that cannot be monetized, distributional effects, and sensitivity to changed assumptions.

When to use it and when it is unsuitable

When to use it

  • When infrastructure projects such as roads, bridges and ports require evidence of social justification and investment priorities
  • When comparing regulatory or policy costs and benefits to demonstrate the relative efficiency of alternatives
  • When selecting the approach and scale with the highest benefits relative to costs among alternatives
  • When expressing grants' or subsidies' effects in monetary terms to meet accountability requirements to funders

When it is unsuitable

  • In fields such as health, welfare and education where monetizing benefits is ethically or technically difficult. Cost-effectiveness analysis (CEA) or cost-utility analysis (CUA) is more appropriate.
  • During emergency response or small evaluations with extremely limited budgets and time. Data collection and analysis are costly.
  • When distributive justice—who benefits and who pays—is the main evaluation criterion. CBA prioritizes aggregate efficiency and obscures distributional issues.

Participants, roles, and deliverables

Participants and roles

Economics or public finance specialist leading the analysis, program staff or engineers providing cost information, and statistics or survey staff conducting willingness-to-pay surveys. An external reviewer is desirable.

Main deliverables

  • Cost and benefit table by item and year
  • NPV, B/C ratio and IRR calculation worksheet
  • Sensitivity analysis table for key parameters
  • CBA report covering assumptions, methods, results and limitations

Implementation steps

  1. Define the scope and perspective
    Set the analytical perspective—society, government or a particular group—and the temporal and geographical scope. State the perspective at the outset because it changes the coverage of costs and benefits.
  2. Identify and account for costs
    Identify additional resource use and external impacts relative to the comparator. For future choices, distinguish unrecoverable sunk costs from future opportunity costs. For ex-post evaluation, state the relevant period and cost coverage separately.
  3. Identify and classify benefits
    List direct and indirect benefits and positive and negative externalities comprehensively. Diagram and organize benefit flows to avoid double counting.
  4. Monetize benefits
    Use market prices where available. For non-market benefits, estimate shadow prices using willingness-to-pay surveys, including contingent valuation or choice experiments, or surrogate-market methods, including hedonic pricing or travel costs. Always document the valuation method and its basis.
  5. Select discount rates and calculate present values
    Select the discount rate and base year from guidance applicable to the analysis purpose, subject and recipient. Keep nominal and real values consistent, and discount future costs and benefits to present value. Show sensitivity to other reasonable settings.
  6. Calculate NPV, B/C ratio and IRR
    Report NPV = benefit PV − cost PV, and B/C ratio = benefit PV ÷ cost PV. Even with positive NPV, consider unmonetized impacts, distribution, budget constraints and alternatives. If using IRR, consider absent or multiple solutions and inconsistent rankings.
  7. Analyze sensitivity and disclose uncertainty
    Use evidence-based alternative settings or ranges for benefits, costs, demand and discount rates to show how NPV, B/C ratios and decisions change. Do not restrict analysis to changing everything by the same percentage.
  8. Add analysis of distribution and justice
    Describe how beneficiaries and cost bearers are distributed beyond the aggregate figures, and add qualitative comments on justice. Describe impacts on disadvantaged groups separately.

Strengths and limitations

Strengths

  • Comparing costs and benefits in common monetary units enables prioritization across policies and alternatives.
  • Provides clear decision criteria in NPV and the B/C ratio, widely recognized as a basis for accountability.
  • The transparent process can withstand external review when assumptions and premises are explicit.
  • Combined with sensitivity analysis, it quantifies uncertainty in decision-making.

Limitations

  • Monetary valuation, especially willingness-to-pay estimates and the value of life, depends on the methods and survey design, so results can differ substantially for the same program.
  • NPV varies with the timing of future costs and benefits and the discount rate, requiring justification and sensitivity analysis.
  • Structurally tends to prioritize efficiency, maximizing aggregate net benefits, and undervalue distributive justice and impacts on vulnerable groups.
  • Monetizing environmental, cultural or life-related values may encounter ethical or political resistance.

Common pitfalls

  • Double counting benefits. Counting both time savings and increased land prices as road improvement benefits can count the same benefit twice.
  • Estimating benefits optimistically and understating costs. Refer to comparable programs' actual results and estimation errors, and explain evidence-based adjustments and scenarios.
  • Reporting a single NPV without sensitivity analysis conceals uncertainty and gives decision-makers false confidence.
  • Do not select a discount rate to fit a conclusion. Changing rates affects results differently depending on cost and benefit timing; report future costs, future benefits and calculation results.

Conditions of use and evidence

  • Compare costs and benefits at present value, and separately report unmonetized impacts and important assumptions. [1]
Fictional example; not actual results

Estimate two years of consultation procedure improvements

A fictional illustrative calculation with an initial cost of JPY 1,000,000, benefits of JPY 600,000 after both 1 and 2 years, no additional costs, and a 5% discount rate.

ItemCalculationFictional value
Present value of benefits60/1.05+60/1.05²Approximately JPY 1,115,600
Present value of costsInitial cost: 100JPY 1,000,000
Net present value111.56−100Approximately JPY 115,600
Benefit–cost ratio111.56/100Approximately 1.116

Common errors in judgment

Common mistake

Assuming the highest benefit–cost ratio is always best

How to revise

Compare scale, budget, net benefits and non-monetary impacts together.

ReasonThe ratio does not capture all net value generated or all aspects of equity.

Common mistake

Adding a cash transfer as a net benefit to society

How to revise

Align whose costs and benefits are counted and distinguish transfers.

ReasonThe same payment is a transfer between payer and recipient.

Organize your thinking by writing

Cost-benefit analysis identification worksheet

A practical template is available to fill in and print on A4 paper.

Open worksheet

Related practical guides

What is SROI?

Related methods

Cost-Effectiveness AnalysisCost-Utility AnalysisSocial Return on InvestmentValue for MoneyRandomized Controlled Trial

References and checked sections

  1. The Green Book (2026)
    HM Treasury · 2026
    Section consulted
    Chapter 6: Shortlist appraisal / Summary metrics of social value
    How it relates to the text
    Compare costs and benefits at present value, and separately report unmonetized impacts and important assumptions.
    Source checked: (includes AI cross-checking)

Editorial and checking information

Content updated: Source checked: (includes AI cross-checking)No documented human reviewIncludes fictional examplesEditorial policy and scope of checkingCite this pageReport a correction

How to cite this page

EvalCompass Editorial Team. “Cost-Benefit Analysis”. EvalCompass, updated 2026-10-07. https://evalcompass.jun-nakatani.com/en/methods/cba/
Add the date you accessed the page. Text created by this site is available under CC BY 4.0. Quotations, external materials, and bundled fonts have their own terms of use. When reusing content, credit the source, link to the license, and indicate any changes.

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Change history
  • — Checked sources for definitions and applicability conditions, and added fictional examples, reasons for judgments and examples for every worksheet field. Revised unverified claims about history and adoption. Also reviewed existing procedures and cautions, and adjusted fixed participant counts and thresholds and generalizations about institutions. Preserved field positions, types and counts while revising fixed conditions and thresholds in the forms.
  • — Correction based on independent content review (content-check-causal). Revised the worksheet to distinguish excluding sunk costs for future choices from including additional resource costs within the period covered by ex-post evaluation.