Cost Benefit Analysis is used to compare costs and benefits of a project over a period of time in monetary terms. Cost-Benefit Analysis (CBA) is a tool used in public decision-making and consists of a set of procedures for defining and comparing benefits and costs. The tool assists in identifying, measuring and valuing in monetary terms the benefits and costs of a project.

Resources such as capital, land, labour and management capacity are relatively scarce and can be allocated by a nation / agency/ person to different uses. What choice is made depends among others on the benefits that the specific allocation creates as compared to the costs of the project; you want to know whether a “project “is worthwhile and whether it is the best alternative.

Public agencies and development organisations will be particularly concerned with the question of whether a proposed project is a good investment in terms of its contribution to the welfare of society. CBA is an instrument that will assist in answering this question

CBA as applied in public decision-making typically takes the perspective of the society and is often referred to as the economic analysis or the economic CBA. This analysis is often complemented by a financial analysis of the project. The financial analysis compares the costs and benefits from the perspective of the project organisation or a specific target group (see text box below). If the CBA is extended to include aspects of income distribution, one speaks of social CBA.

CBA is one element in the overall appraisal (including technical, social, environmental, legal and institutional issues) of a project. CBA contributes to narrowing the margin for pure judgement in the decision-making on proposed projects. The output of a CBA might be a recommendation on the acceptance or rejection of a project, or the identification of bad project components, which could lead to adjustments in the project design (Dopheide, 2003).

In both economic and financial analysis,  cost and benefits are assessed  in the  situation with- and without the project.  Cost and benefits have their own ‘autonomous” development if no project is carried out (see figure    ) 

• Project benefits are benefits with the project minus the benefits without the project.;
• Project costs are the costs with the project minus the costs without the project.

Costs and Benefits occur in different amounts and at different time periods during the project,  so in order to compare these costs and benefits, both costs and benefits have to be discounted (against a certain interest rate). Since money today is worth more than money in the future . Example:  Two financial concepts;

If a person lends money to another person, he is entitled to some kind of reward. This reward is called interest.
A certain sum of money today, earning interests from year to year will grow to become a larger sum of money in the future depending on the rate of interest; this is called compounding. Conversely, a certain sum of money at some time in the future is equivalent to a smaller sum of money today, depending on the interest rate.; this is called discounting. 

Basic CBA steps (Dopheide,2003):

• Define scope of the project: public/private, time horizon, physical boundaries of the study
• Identify the type of costs and benefits (See table 7.8)
• Put monetary values on costs and benefits. Special care should be taken with inflation. Usually cost and benefits are considered without taking inflation into consideration
• Compare costs and benefits. Organize costs and benefits over time.
• Calculate profitability indicators/decision criteria
• Sensitivity analysis
• Make recommendations