Cost Effectiveness Analysis

5 minutes 5 Questions

Cost Effectiveness Analysis (CEA) is a method for assessing the gain in benefits relative to the costs of different alternatives. It's a way to determine the best approach when there are multiple ways to achieve a certain goal and resources are limited. CEA measures outcomes in a natural unit (e.g., cost per life year saved, cost per number of students taught, etc). This allows comparing the cost-effectiveness of different interventions directly. The goal of CEA is to identify the alternative that provides the 'biggest bang for the buck' when resources are limited.

Guide: Understanding and Answering Questions on Cost Effectiveness Analysis

What is Cost Effectiveness Analysis?
Cost Effectiveness Analysis (CEA) is a type of economic analysis used to gauge the relative costs and outcomes of different options. It is particularly useful in decision-making scenarios, where resources are limited, and there is a need to allocate them effectively. The results of a CEA are usually expressed in terms of a ratio, where the denominator is the gain in health from a measure and the numerator is the cost associated with the health improvement.

Why It Is Important?
The importance of CEA comes in its ability to equate the costs and effects of different decisions. This provides a basis for decision-makers in selecting the economically efficient alternatives for allocation of resources. It aids in determining whether an intervention is worth implementing, given its cost and the health benefits it could potentially provide.

How it Works?
CEA measures the cost-effectiveness ratio (CER), calculated as Cost/Effect by comparing the costs and effects of two or more alternatives. Computation of CEA involves systematic gathering of costs and effects, as well as conversion of these into a common unit. This allows for the comparison between diverse alternatives to help determine which provides the best value.

Exam Tips: Answering Questions on Cost Effectiveness Analysis
1. Understand the basics: Knowing what CEA is, why it is used, and how it works is the first step to successfully answering exam questions.
2. Analyze the question: Understand what the question is asking. Is it related to theoretical knowledge about CEA or its application?
3. Use examples: Using real-world examples can help you better explain your arguments and shows your understanding of the concept.
4. Be clear and concise: Avoid irrelevant details and focus on the key elements that address the question directly.
5. Show your working: In questions where you might be asked to compute a CER, show your working clearly as you might score partial points for the method, even if your final answer is incorrect.

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CAPM - Cost Benefit Analysis Example Questions

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Question 1

A project targeted towards environmental sustainability is expected to save the organization $150,000 per year, and the project expenditure is $600,000. In order to determine if the project is cost-effective, a project manager would need to calculate if the projected savings over how many years exceeds the project expenditure?

Question 2

ABC Enterprises initiated a project worth $200,000 expecting a benefit of $300,000. The project has a 10% chance of having an extra cost of $30,000 due to a specific risk. How should the project manager proceed?

Question 3

A project manager is evaluating two alternatives for a new product launch. Project A costs $500,000 with expected benefits of $750,000. Project B costs $700,000 with expected benefits of $1,100,000. Which project should be chosen based on Cost Effectiveness Analysis?

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