Business Case Writing Cost-Benefit Analysis Techniques 1

Question 1

In a cost-benefit analysis (CBA), the 'discount rate' is used to:

Accepted Answer

Convert future costs and benefits to present-day values

Answer

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:

Accepted Answer

The present value of benefits exceeds the present value of costs

Answer

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?

Accepted Answer

Fixed overhead costs that don't change with the decision

Answer

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:

Accepted Answer

OMB Circular A-94 guidelines

Answer

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'?

Accepted Answer

Expenses that will not be incurred because of the proposed solution

Answer

Cost avoidance represents future costs that will not occur if the project is implemented, and should be counted as a benefit in the CBA.

Business Case Writing Practice Test

Business Case Writing Practice Test

Business Case Writing Cost-Benefit Analysis Techniques 1