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Cost Effectiveness Analysis and Cost Benefit Analysis



Cost Effectiveness Analysis and Cost Benefit Analysis 1) What is the difference between a cost-benefit analysis and a cost-effectiveness analysis? Give an example of a situation in which a cost-benefit analysis would be appropriate and an example of a situation in which a cost-effectiveness analysis would be appropriate? 2) A company is planning to invest $75,000 (before taxes) in a personnel training program. The $75000 outlay will be charged off as an expense by the firm this year (Year 0). The returns estimated from the program in the forms of greater productivity and less employee turnover are as follows (on an after-tax basis): Years 1-10: $7,500 per year Years 11-20: $22,500 per year The company has estimated its cost of capital to be 15%. Assume that the entire $75,000 is paid at time zero (the beginning of the project). The marginal tax rate for the firm is 40%. Based on the net present value criterion, should the firm undertake the training program? All Four Types Of Analyses Are Just Sub-Types Of Decision Analysis. A Decision Analysis Is A Technique To Help Make Decisions Under Conditions Of Uncertainty. A Cost-Effectiveness Analysis Is A Type Of Decision Analysis That Generates Results Where Cost Is In The Numerator, And A Measure Of Effectiveness Is In The Denominator. The Most Typical Measure Of Effectiveness Is “Life Years.” The Cost Benefit Analysis And Cost Effectiveness Analysis Are Widely Used By Companies For Capital Budgeting Decisions. There Are Difference Between Cost Effectiveness Analysis And Cost Benefits Analysis. In The Cost Benefit Analysis, There Is Cost In The Numerator And Denominator. The denominator is cost which a company is willing to pay. Whereas the cost effectiveness analysis is also a decision analysis tool. In this analysis, cost is numerator and measure of effectiveness is denominator. The effectiveness measure tool is “Life Years”. Business Management Assignment Help, Business Management Homework help, Business Management Study Help, Business Management Course Help


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