What are the advantages and limitations of conducting a Cost-Benefit Analysis?

A cost-benefit analysis can be a useful tool for decision-making, but the accuracy of a cost-benefit analysis is limited by the thoroughness of recognizing likely costs and benefits. If a business fails to recognize potential costs and benefits, it can cause poor results that lead to sub-optimal decisions

Simplicity

Cost-benefit analyses are advantageous because they simplify complex business decisions. Different business projects might entail vastly different types of expenses and details at a low level, but a cost-benefit analysis frames all projects in the same simple terms: total benefits, minus total costs, equals net benefit. 

Objectivity

Another benefit of a cost-benefit analysis is that it provides an objective way to compare projects. Business owners who are emotionally attached to or have time invested in certain projects may be predisposed to pursue those projects, even if there are better options available.

Considerations

A cost-benefit analysis can be a useful tool for decision-making, but the accuracy of a cost-benefit analysis is limited by the thoroughness of recognizing likely costs and benefits. If a business fails to recognize potential costs and benefits, it can cause poor results that lead to sub-optimal decisions. For example, if a factory fails to account for the environmental impact of its operations as a cost, it could lead it toward projects that create more pollution, which might be bad for society and hurt the company's reputation.

      

Giving their advantages and disadvantages, should the Cost-Benefit Analysis be carried out in every organisation? In answering this question, provide a brief explanation of the significant advantages for the organisations.

Yes, it should be carried out in every organisation.

Disadvantages:

1. Potential Inaccuracies in Identifying and Quantifying Costs and Benefits

Cost-Benefit analysis requires that all costs and benefits be identified and appropriately quantified. Unfortunately, human error often results in common cost-benefit analysis errors such as accidentally omitting certain costs and benefits due to the inability to forecast indirect causal relationships. Additionally, the ambiguity and uncertainty involved in quantifying and assigning a monetary value to intangible items lead to inaccurate cost-benefit analysis. These two tendencies lead to inaccurate analyses, which can lead to increased risk and inefficient decision-making.

2. Increased Subjectivity for Intangible Costs and Benefits

Another disadvantage of the cost-benefit analysis is the amount of subjectivity involved when identifying, quantifying, and estimating different costs and benefits

Benefit for an organisation:

A cost-benefit analysis (also known as a benefit-cost analysis) is a process by which organizations can analyze decisions, systems or projects, or determine a value for intangibles. The model is built by identifying the benefits of action as well as the associated costs and subtracting the costs from benefits