How much is the investment required?. What are the benefits?. How much time will it take to get the benefits?. These are the three questions that will help us to prevent wrong investment decisions, irrespective of whether it is building the tallest tower in the world or buying a new car.
Projects are no exception. One of the root causes for project failures are lack of profitability, which could have been avoided if someone dared to ask these two simple yet powerful questions. Good companies ask these questions at the requirement level. For each requirement they estimate the cost associated with it, and the quantified benefits from that feature when implemented. This helps organizations to focus on the mandatory requirements first than on the nice to have requirements.
Cost Benefit Analysis Steps
Define the goals and objectives of the action
List alternative actions
Measure all cost and benefit elements, including direct and indirect costs for all alternatives
Analyse outcome of costs and benefits over the relevant time period for all alternatives
Convert all costs and benefits to currency
If it is a major investment, perform Net Present Value (NPV) calculations for all alternatives
Prioritize the options based their NPV and Payback period.
Present recommendations to the stakeholders.
For me it has become a way of life. For every decision which involves time and cost I automatically ask these two questions ‘How much it will cost?’ and ‘What are the benefits?’. That saves me lot of time and money. I am still driving my good old car, because I am unable to justify the purchase of a new one.