Business Case Writing Cost-Benefit Analysis Techniques 2 — Questions and Answers
Question 1: Which CBA technique is most appropriate when benefits are difficult to monetize but can be clearly defined?
- Net Present Value
- Cost-effectiveness analysis (Correct answer)
- Break-even analysis
- Payback period
Correct answer: Cost-effectiveness analysis
Cost-effectiveness analysis compares costs to non-monetary outcomes (e.g., lives saved, emissions reduced) when benefits resist dollar quantification.
Question 2: In a business case, 'lifecycle cost analysis' ensures that decision-makers consider:
- Only the upfront purchase price
- All costs from acquisition through disposal over the asset's full life (Correct answer)
- Year-1 ROI only
- Vendor marketing claims
Correct answer: All costs from acquisition through disposal over the asset's full life
Lifecycle cost analysis prevents decisions based solely on initial price by accounting for ongoing operations, maintenance, upgrades, and disposal costs.
Question 3: Which analytical error occurs when a CBA double-counts the same benefit in two different categories?
- Opportunity cost error
- Double counting (Correct answer)
- Sunk cost fallacy
- Inflation bias
Correct answer: Double counting
Double counting inflates projected benefits by recording the same value twice under different labels, overstating the investment's appeal.
Question 4: When comparing options with different useful lives in a CBA, analysts should use:
- Simple payback period only
- Equivalent Annual Annuity (EAA) or a common time horizon (Correct answer)
- IRR comparison only
- Purchase price comparison
Correct answer: Equivalent Annual Annuity (EAA) or a common time horizon
EAA or a common time horizon ensures apples-to-apples comparison when options have different durations, avoiding misleading conclusions.
Question 5: In a CBA, a 'willingness to pay' approach is used to estimate:
- Employee compensation
- The monetary value of benefits that users cannot directly pay for (Correct answer)
- Vendor pricing
- Tax obligations
Correct answer: The monetary value of benefits that users cannot directly pay for
Willingness to pay surveys or models estimate how much beneficiaries value non-market goods or services, enabling their inclusion in the CBA.
Question 6: Which approach is recommended in US federal CBAs for valuing the statistical value of a human life?
- It is never included in US federal CBAs
- Value of a Statistical Life (VSL), as published by relevant agencies (Correct answer)
- Market wage rate only
- Life insurance payout values
Correct answer: Value of a Statistical Life (VSL), as published by relevant agencies
Federal agencies use VSL estimates (e.g., EPA's ~$11.6M VSL) to quantify the benefit of policies that reduce mortality risk in regulatory CBAs.
Business Case Writing Cost-Benefit Analysis Techniques 2
Which CBA technique is most appropriate when benefits are difficult to monetize but can be clearly defined?