Cost and Benefit Analysis (CBA) in Investment

One of the popular investment methods used for decision-making is called cost and benefit analysis (CBA). This method is mostly employed by corporations to find investment opportunities. A CBA analysis includes three steps. First, create a list of all advantages and disadvantages of an investment. Second, give a monetary value to each item on the list. Finally, divide the value of benefits by costs. If the value is greater than 1, it may mean there is an opportunity there. CBA is especially employed for long-term investments. However, it may fail to give accurate results by not including many factors that can impact the decision in the future.

CBA is closely related to Opportunity Cost. Opportunity cost is making a decision and accept the consequences of your decision over other decisions (opportunities). Another term related to CBA which is especially used in investment is called Net Present Value (NPV). NPV is a method of calculating the future benefits or costs of a decision by using their present values. If the future benefits are greater than future costs, it is a good decision. To get better results with CBA, macro-economic factors such as inflation, market cycles, and political atmosphere should be taken into consideration.

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