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Cost Benefit Analysis

5 minutes 5 Questions

Cost Benefit Analysis (CBA) is a systematic process used in project management to estimate the financial feasibility of a project by evaluating the potential benefits and costs associated with it. The objective of CBA is to help stakeholders make informed decisions about project prioritization, res…

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PMP - Cost Benefit Analysis Example Questions

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Question 1

A company is evaluating two HR initiatives using cost-benefit analysis. Initiative A involves implementing a new HR software system with an initial cost of $100,000 and annual maintenance of $10,000. It is expected to generate annual benefits of $50,000 over 4 years. Initiative B involves launching a new employee wellness program with an initial cost of $120,000 and no ongoing costs, expected to generate annual benefits of $40,000 over 4 years. Which initiative has a higher benefit-cost ratio (BCR) over the 4-year period?

Correct Answer: 1.43

Initiative A incurs a total cost of $140,000, which includes the initial $100,000 and $10,000 annual maintenance over four years. It generates total benefits of $200,000 over the same period, resulting in a benefit-cost ratio of 1.43. Initiative B has a lower benefit-cost ratio of approximately 1.33, making Initiative A the option with the higher benefit-cost ratio.

Question 2

Project X and Y have benefit-cost ratios of 0.8 and 1.3 respectively, which project would you recommend based on cost-benefit analysis?

Correct Answer: Project Y

In cost-benefit analysis, the benefit-cost ratio is a measure of the projected returns of a project against its costs. A project with a benefit-cost ratio greater than 1 is considered beneficial, as it is predicted to generate returns greater than its costs. In this case, Project Y has a benefit-cost ratio of 1.3 while Project X has a benefit-cost ratio of only 0.8. This implies that Project Y will bring returns greater than its costs, whereas Project X will not. Therefore, based on cost-benefit analysis, Project Y is the recommended choice. As for 'Both Projects', although combining projects could theoretically enhance the overall benefit-cost ratio, it is not applicable here as Project X has a ratio less than 1, making it unfeasible. The option 'None of the Projects' is incorrect as Project Y has a beneficial ratio.

Question 3

A project manager is considering two technologies to improve team communication. The first tool costs $10,000 upfront with a yearly maintenance cost of $2,000, but will reduce stakeholder time costs by 30%. The second tool costs $5,000 upfront with a yearly maintenance cost of $3,000, but will reduce stakeholder time costs by 15%. If the current stakeholder time costs are $50,000 per year, based on a cost-benefit analysis over a 5-year period, which technology should the manager choose?

Correct Answer: The First tool

Over a 5-year period, the first tool results in a net benefit of $55,000, while the second tool results in a net benefit of $17,500. Therefore, the first tool is the better choice based on the cost-benefit analysis.

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