Cost Benefit Analysis – 10 Most Common Myths Debunked

Myth #1. It is only applicable to big business and government.

The common misconception is that Cost Benefit Analysis is only applicable to those companies or government departments that have a vast store of funds and have specialists to call on to pump out complex recommendations. Recommendations that relate to capital purchases and allocation of funds amongst competing projects or programs.

The truth is, that this method is equally applicable to small and large businesses or any size in between. It is really useful when any business or government is faced with having to make Capital Purchase decisions. For example:

Is it in the best interests of the company to invest in a new production line to boost output or to repair and maintain the current system?

Is this model PC a better investment than another PC? Do we really need to upgrade at all?

Or, is it in the best interests of the community to invest in safer school crossings, or apply the funds to environmental rehabilitation projects?

Myth #2. It is too complex for the layman to understand.

If you can read and understand this article and can do some basic math you can master Cost Benefit Analysis and apply it like a professional.

There are certain requirements that must be followed, but the actual process of working out the final answer, termed the Benefit Cost Ratio, is really quite straightforward. If you have a basic understanding of spreadsheets, that will make it even easier.

Myth #3. It will take too long to learn.

The beauty of this method is that it can be learnt in less than 2 hours. You only need to follow the rules and apply them. Once you have learnt the basics, then you can apply the method to simple or complex problems, small or large businesses, or low-cost to high-priced projects. You don’t need to learn new skills to apply it in different situations.

Myth #4. Easier ways give the same answers.

There are many ways used to come up with an answer to solve capital purchase and funds allocation questions. Some are OK and some are not so good. Since this proven and tested Cost Benefit Analysis method is used right around the world by governments and big business wouldn’t you be safer using the same method, built on the same principles?

The problem is that most times, these decisions can have a critical bearing on the success of the company – not to mention your reputation as well. The best answers can only be arrived at, by using the best method, and this is it.

Myth #5. Its only for accountants and managers.

Some would have you believe that this method is best undertaken by accountants and managers. Not true. Anyone with an average level of intelligence at any level in a business can use this well, if the rules are followed and applied.

Myth #6. It takes too long to assemble all the data.

This may well be true in some cases. Complex, high-cost problems that require a solid recommendation may need some time spent in collecting all the costs and benefits. However, when the correct answer is critical to the health of the business, sufficient time must be spent to get the RIGHT answer – not just AN answer.

You will find that once you have done a few of these, the costs and benefits will come to hand fairly easily and in a short period of time.

Myth #7. Its OK as a theory but it doesn’t really work in practice.

I have witnessed this working in many situations – from PC purchases to multi-million dollar asset replacement decisions. When it comes to capital purchase decisions – this is the best way to go.

Using this method has many advantages – a few are listed below:

– Compares competing projects quickly and accurately – saving time and effort.

– Quickly determines whether a project is VIABLE or UNVIABLE – easily cut out unviable options, thereby saving time and effort

– Decisions can withstand external scrutiny – saving worry and concern

– Allows accurate post-implementation review of original assumptions, so errors made in this project are not carried over to subsequent projects

Myth#8. It has only limited applicability.

Cost Benefit Analysis is best used in capital purchase situations, repair or replace decisions, and/or funding allocation choices. However, the method if used on these types of decisions is equally at home in large or small, complex or simple and low-cost to high-cost decisions.

Myth #9. It is too costly to implement.

The cost to implement this method across all sizes and complexity of decisions will be relative. Higher costs for high complexity decisions and the opposite is also true. Once the method has been used a few times the cost to apply it to these problems will reduce.

I know this to be true. I have seen it work and have been part of the process.

Myth #10. There are too few examples to learn from.

The Internet is full of examples. From the 1960s airports site decisions, to current events such as the allocation of funding (amount of funds to repair damage from Hurricane Katrina). Also there are numerous references to environmental decisions, allocation of government funds, sighting of school crossing traffic lights, cancer research, railway level crossing expenditure, new dam concerns and the list goes on and on.

In summary, Cost Benefit Analysis is easy to learn and is applicable across a wide range of topics and types of businesses. Take the time to learn how to apply it. Your career, your reputation and your prospects will definitely benefit.

Bruce Hokin