Business Case Writing Cost-Benefit Analysis Techniques 1 — Questions and Answers
Question 1: In a cost-benefit analysis (CBA), the 'discount rate' is used to:
- Negotiate vendor discounts
- Convert future costs and benefits to present-day values (Correct answer)
- Calculate employee bonuses
- Determine marketing budgets
Correct answer: Convert future costs and benefits to present-day values
The discount rate reflects the time value of money — a dollar received in the future is worth less than a dollar today, and the discount rate quantifies this difference.
Question 2: A cost-benefit analysis is considered 'favorable' when:
- Total costs are maximized
- The present value of benefits exceeds the present value of costs (Correct answer)
- All risks are eliminated
- The payback period exceeds 10 years
Correct answer: The present value of benefits exceeds the present value of costs
A favorable CBA demonstrates that the discounted value of expected benefits outweighs the discounted value of all costs, justifying the investment.
Question 3: Which cost category is typically excluded from a business case CBA because it remains constant regardless of the decision?
- Variable costs
- Incremental costs
- Fixed overhead costs that don't change with the decision (Correct answer)
- Direct labor costs
Correct answer: Fixed overhead costs that don't change with the decision
Costs that remain the same regardless of which option is chosen are irrelevant to the decision and should be excluded from the incremental CBA.
Question 4: In US public sector cost-benefit analyses, the social discount rate used by federal agencies is typically determined by:
- The Federal Reserve
- OMB Circular A-94 guidelines (Correct answer)
- The CBO baseline rate
- Individual agency discretion only
Correct answer: OMB Circular A-94 guidelines
OMB Circular A-94 specifies the discount rates federal agencies must use when conducting economic analyses for regulatory and program decisions.
Question 5: Which type of benefit is captured in a CBA as 'cost avoidance'?
- New revenue generated by the project
- Expenses that will not be incurred because of the proposed solution (Correct answer)
- Tax credits received from the IRS
- Marketing ROI
Correct answer: Expenses that will not be incurred because of the proposed solution
Cost avoidance represents future costs that will not occur if the project is implemented, and should be counted as a benefit in the CBA.
Question 6: A 'full-cost accounting' approach in a business case CBA differs from traditional accounting because it:
- Ignores indirect costs
- Includes all direct, indirect, and social costs of an initiative (Correct answer)
- Only counts capital expenditures
- Excludes operating costs
Correct answer: Includes all direct, indirect, and social costs of an initiative
Full-cost accounting captures all costs — including overhead, externalities, and societal impacts — to provide a complete economic picture.
Business Case Writing Cost-Benefit Analysis Techniques 1
In a cost-benefit analysis (CBA), the 'discount rate' is used to: