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Cost Utility Analysis

5 minutes 5 Questions

Cost Utility Analysis (CUA) is a method of economic evaluation that compares the cost and outcomes of different courses of action. CUA measures benefits in terms of Quality Adjusted Life Years (QALYs) or Disability Adjusted Life Years (DALYs). This type of analysis enables comparison across differe…

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CAPM - Cost Utility Analysis Example Questions

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Question 1

You are a project manager of a multi-phase construction project. In phase 1, the total cost is $1,000,000 with a utility value of 0.5. In phase 2, due to some unexpected geological conditions, the cost increases by $200,000 but the utility remains the same. What is the impact on project's cost-utility?

Correct Answer: The overall cost-utility will decrease

Cost-utility is a measure of the cost-effectiveness of an operation, calculated as the total cost divided by its utility value. Utility is a measure of the usefulness or benefit brought by a project. In phase 1, the cost-utility is $1,000,000 divided by 0.5 = $2,000,000 per utility unit. In phase 2, the cost increases to $1,200,000 (original $1,000,000 plus additional $200,000), while utility remains the same (0.5). Thus, the new cost-utility is $1,200,000 divided by 0.5 = $2,400,000 per utility unit. Therefore, the overall cost-utility will decrease since the cost per utility unit has increased. The other options are incorrect because the cost-utility does not stay the same, does not increase, and it does not depend on the utility of phase 3.

Question 2

James is managing a software project with a estimated cost of 250,000 dollars. Due to an unforeseen issue with licensing, the project's cost increases by 10%. If the utility of the project remains constant at 0.6, what is the new cost utility?

Correct Answer: The cost utility decreases

To solve this problem, let's follow these steps: Calculate the new cost after the 10% increase: Original cost: 250,000 dollars Increase: 10% of 250,000 = 25,000 dollars New cost: 250,000 + 25,000 = 275,000 dollars Understand what cost utility means: Cost utility is typically calculated as utility / cost Calculate the original cost utility: Original cost utility = 0.6 / 250,000 = 0.0000024 Calculate the new cost utility: New cost utility = 0.6 / 275,000 = 0.00000218 Compare the results: The new cost utility (0.00000218) is lower than the original cost utility (0.0000024) Therefore, the correct answer is: The cost utility decreases The cost utility has decreased because the cost has increased while the utility remained constant. This means we're getting the same benefit (utility) for a higher cost, which results in a lower cost utility ratio.

Question 3

A $550,000 project with a utility measure of 0.6 faces a 10% increase in costs due to supplier pricing. If the utility remains the same, what is the effect on the cost utility?

Correct Answer: The cost utility will decrease.

Cost-utility is a measure of cost-effectiveness that compares the relative costs and outcomes (effects) of different courses of action. In this case, the project's cost is increasing by 10% due to supplier pricing while the utility remains the same. This means you're paying more (higher cost) for the same utility, hence the cost utility will decrease. 'The cost utility will increase' and 'The cost utility will remain same' are incorrect because in both cases, they ignore the fact that the costs have increased without a corresponding increase in utility. 'The cost utility is not affected by the supplier pricing' is also not correct because supplier pricing is directly affecting the cost of the project.

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