The complete guide to cost-benefit analysis with examples and templates

No matter what your team does or what industry you’re working in — time is money. Organizations can’t afford to waste time, funding, and resources on projects that aren’t going to pay off in the long run.

But you’re probably asking yourself: “How can I figure out whether a project is going to be worthwhile before I’ve invested loads of time and money in it?”

The answer: perform a cost-benefit analysis.

In this guide, we’ll explain what a cost-benefit analysis is, how to perform one, the different methodologies you can use, and how monday.com can simplify the cost-benefit analysis process with its built-in template.

What is a cost-benefit analysis?

A cost-benefit analysis (CBA), also called a benefit-cost analysis, is a systematic approach used to estimate and compare the costs and benefits of a project, decision, or policy to determine its overall value and feasibility. The primary purpose of a CBA is to help decision-makers evaluate whether the benefits of a proposed action outweigh its costs.

CBA quantifies both costs and benefits in monetary terms, allowing decision-makers to assess whether the benefits of a project outweigh its costs. For example, let’s say you run a public relations firm and you’re thinking about taking on a marketing campaign with a big-name client.

If you were to conduct a cost-benefit analysis, you might find the project itself is expected to cost you $15,000 in resources. But the client is going to pay you $20,000, and there’s a strong potential for additional business after delivery.

In this case, the expected benefits of taking on this marketing campaign outweigh the costs — so it sounds like a winner on paper. But if the costs of taking on a project like that outweighed the benefits, you may want to rethink your involvement.

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In addition to helping you determine whether a project is justifiable or feasible, performing a cost-benefit analysis will also enable you to create a baseline by which you can compare the costs and benefits of other projects.

How? By conducting a systematic approach to pre-plan what a project will cost and what it’ll bring in, you can develop a point of reference for each additional project you’d like to analyze.

A cost-benefit analysis can be super simple to perform. But it’s worth bearing in mind that you can use many different methodologies and measurements, so it can be as straightforward or as complicated as you want to make it.

When should you use a cost-benefit analysis?

You can use a cost-benefit analysis (CBA) across various sectors, such as:

• Business decisions: Companies use CBA to evaluate new projects, investments, or operational changes to ensure profitability.
• Public policy: Governments apply CBA to assess the economic impact of regulations or public health interventions, helping prioritize resource allocation.
• Project management: In project planning, CBA helps determine whether a proposed initiative is worth pursuing based on its financial viability.

CBA works best in the following situations:

• When evaluating major business decisions or projects, such as:
  • Developing new business strategies
  • Making significant resource allocation or purchase decisions
  • Deciding whether to pursue large new projects
  • Comparing major investment opportunities
• When faced with decisions with clear economic benefits and costs that you can quantify monetarily, for example, cost-benefit analyses work better when evaluating financial feasibility rather than subjective factors.
• When you need to remove emotion from assessments, for example, to provide an objective, data-driven framework for decision-making.
• As part of feasibility studies, for example, determining if a project or business initiative meets technical, economic, legal, and market criteria.
• When preparing business requirements documents, for example, explaining what a project entails and requires for successful completion.
• When comparing completed or potential courses of action, for example, estimating the value against the cost.

It’s important to note that while cost-benefit analysis is a valuable tool, it has limitations for complex decisions or when dealing with intangible factors that are difficult to quantify monetarily. In such cases, you may need to supplement it with other analysis methods.

We’ll break those different methods down for you in just a minute. First, let’s take a look at the basic building blocks of a standard cost-benefit analysis.

How do you perform a cost-benefit analysis?

Your business and the projects you undertake are totally unique, so you’ll have different costs and benefits than other organizations. But no matter what your overheads or targets look like, the cost-benefit analysis process is straightforward and only involves four steps.

1. Establish a framework

If you want your cost-benefit analysis to be accurate, you’ll need to set up a framework. That means identifying all of the goals you want your CBA to achieve. Think hard about what you want your project to accomplish so you can better determine your costs and benefits.

Next, you’ll have to choose a metric for measuring and comparing your costs and benefits. If you want your analysis to be fair and accurate, you’ll need to assign a common currency.

That doesn’t mean you need to assign a monetary value to them — although that does make it a lot easier — it just needs to be something that lets you compare apples to apples.

2. Identify costs and benefits

After building a framework, it’s time to make two lists: one for all the projected costs and one for all the expected benefits. That might sound fairly simple at first glance, but think hard about both lists. There are several different kinds of costs and benefits to consider, and they’re not always obvious.

Different types of costs include:

• Direct costs like labor, manufacturing costs, materials, or inventory.
• Indirect costs like utilities or rent for your premises.
• Intangible costs like decreased productivity levels if you divert your resources to a new project.
• Opportunity costs like how much money you stand to lose by choosing one project over another.

The same logic applies to benefits. Sometimes, the benefits your business stands to gain from a project are more nuanced and include:

• Direct benefits like increased sales or revenue from completing a new project.
• Indirect benefits like increased brand interest after finishing a successful project.
• Intangible benefits like enhanced team morale.
• Competitive benefits like becoming the first within your industry to tap into a new market.

Not all of these costs or benefits apply to every project. However, you should always strive to make your lists as complete as possible.

3. Assign value

After you’ve created your exhaustive lists of costs and benefits, you’ll need to assign a common currency or monetary term to compare them.

Again, assigning a monetary unit to your list of items will make this exercise much easier — but that’s not always practical.

You could also compare hours spent, stock quantities, or anything else that makes sense to your business and enables you to conduct an effective CBA.

4. Work out your values and compare

After you’ve completed your lists and assigned a common currency, it’s time to tally up both lists and compare them.

If the expected benefits outweigh the projected costs, there’s a good business case for you to go ahead with the project. If the future costs outnumber the future benefits, you should think twice about pursuing this particular project.

Alternatively, you may want to go back to your list of costs and consider the places and ways in which you can reduce them to make the project more economically viable.

Now, you can use several different methods to compare your costs and benefits — but we’ll get to that in a second.

After working out your comparison, it’s also worth revisiting your framework in step one to ensure the project is compatible with your goals and strategy.

Cost-benefit analysis examples

These examples demonstrate how you can apply cost-benefit analyses to various scenarios, from business projects to public initiatives, to evaluate their potential value and inform decision-making.

Here, we’re using the Cost-Benefit Ratio, which divides the present value of benefits by the present value of the costs. A ratio greater than one indicates that the benefits outweigh the costs.

1.  Software implementation project

Costs:

• Software license: $50,000
• Implementation services: $30,000
• Staff training: $10,000
• Annual maintenance costs: $5,000/year for 5 years

Total costs (present value): $110,000

Benefits:

• Increased productivity: $40,000/year for 5 years
• Reduced errors: $15,000/year for 5 years
• Improved customer satisfaction: $10,000/year for 5 years

Total benefits (present value): $275,000

Cost-benefit ratio: 275,000 / 110,000 = 2.5

This ratio indicates the project is expected to deliver $2.50 in benefits for every $1 spent, suggesting it’s a worthwhile investment.

2. Public transportation expansion

Costs:

• Infrastructure construction: $10 million
• New vehicles: $5 million
• Annual operating costs: $2 million/year for 10 years

Total costs (present value): $30 million

Benefits:

• Reduced traffic congestion: $3 million/year for 10 years
• Lower emissions: $1 million/year for 10 years
• Increased economic activity: $2 million/year for 10 years

Total benefits (present value): $50 million

Cost-benefit ratio: 50 million / 30 million = 1.67

The ratio suggests the project would generate $1.67 in benefits for every $1 invested, indicating it could be a beneficial community project.

3. Employee wellness program

Costs:

• Program setup: $50,000
• Annual program costs: $30,000/year for 5 years

Total costs (present value): $170,000

Benefits:

• Reduced healthcare costs: $40,000/year for 5 years
• Increased productivity: $25,000/year for 5 years
• Lower absenteeism: $15,000/year for 5 years

Total benefits (present value): $335,000

Cost-benefit ratio: 335,000 / 170,000 = 1.97

This ratio indicates the wellness program is expected to deliver $1.97 in benefits for every $1 spent, suggesting it’s a good investment for the company.

Pros and cons of using cost-benefit analysis 

Here are the advantages and disadvantages of using cost-benefit analysis (CBA):

Pros

1. Data-driven approach: CBA provides an objective, evidence-based evaluation of options, reducing biases in decision-making.
2. Simplifies complex decisions: CBA makes complex business choices simpler by reducing decisions to costs versus benefits.
3. Uncovers hidden factors: The CBA process forces you to outline all potential costs and benefits, which can reveal less obvious indirect or intangible factors.
4. Improves strategic planning: The extensive research required strengthens findings and supports better strategic planning.
5. Provides clarity: CBA gives an opportunity to delve into specifics about expenditures and anticipated outcomes.

Cons

1. Difficulty predicting all variables: It’s challenging to forecast all factors that may impact outcomes, especially for long-term projects.
2. Susceptible to inaccurate data: Incorrect or incomplete data can skew results and lead to faulty conclusions.
3. Limited applicability for long-term projects: CBA is better suited for short- and mid-length projects due to increasing uncertainty over time.
4. Removes gut instinct: While promoting rational decisions, CBA may discount valuable intuition or emotional factors in decision-making.
5. May oversimplify complex situations: The clarity provided by CBA can create an illusion of certainty in unpredictable situations.
6. Resource intensive: Conducting a thorough CBA requires significant time, effort, and, potentially, financial resources.
7. Relies on subjective valuation: Assigning monetary values to intangible costs or benefits introduces subjectivity and uncertainty.

What methods can you use for a cost-benefit analysis?

A cost-benefit analysis, sometimes referred to as economic analysis or cost-effectiveness analysis, has the same goal no matter how it’s performed — to determine whether a project’s cost outweighs the benefits.

But it’s important to remember that there are different techniques you can use to carry out a cost-benefit analysis depending on what’s important to you. Some of these methods are simple enough to do with the calculator on your phone. Others require more complex algebraic formulas.

We already highlighted the BCR method in the examples above, but here are three more cost-benefit analysis methodologies to help you get started.

Net Present Value (NPV)

When most people conduct a cost-benefit analysis, they look at net present value (NPV).

Net present value describes the difference between costs and benefits as they occur over a period of time. It’s used in numerous financial models when a company wants to assess whether an investment will pay off over time.

To calculate your NPV, you’ll need to find the difference between your present cash inflows and outflows over time. The formula to find that difference is:

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In this formula, “i” represents a discount rate, and “t” represents your chosen period.

Confused? It makes more sense if you look at a quick example.

Let’s say you’re considering a project that costs $1,000. You’re expecting the project to generate cash flows of $1,300 over the next year — and the rate of return you hope to see is 8%.

You’d calculate your NPV by adding 1 to 0.8 and then taking it to the first power (for your period of 1 year). Divide your cash flow ($1,300) by that number, and you’ve got $1,203.70. Finally, subtract your initial investment ($1,000) from that number.

You’re left with $203.70. That means the project you’re working on leaves you $203.70 in the black right now.

Why isn’t it $300? ($1,300 in benefits – $1,000 in costs.)

Because $300 in one year is only worth $203.70 in your pocket today. Remember: time is money.

Return on Investment (ROI)

Head spinning from NPV? Don’t worry because chances are, you know all about the following cost-benefit analysis method: return on investment (ROI).

ROI is simply your net income divided by the cost of an investment. This equation will leave you with a ratio or percentage that will tell you how big of a return you’re getting on each dollar you invest in a project.

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That’s all there is to it. ROI is one of the simplest ways to conduct a cost-benefit analysis — which is why it’s so popular.

Internal Rate of Return (IRR)

Missing your high school algebra? The following method — Internal Rate of Return (IRR) — will take us right back there again.

IRR is the discount rate a company uses to make the net present value of a project zero.

In other words, IRR is the expected annual rate of return you’ll get on a project.

It’s ideal for analyzing big budgets and comparing returns over time, but it can be tricky to calculate manually.

The formula is:

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Don’t worry — we’ll do another quick example.

Let’s return to that $1,000 project example we discussed earlier. We know the NPV is $203.70, right?

Well, to figure out the IRR, we want to make the NPV zero. Then, replace the discount rate of 8% with IRR. You then have to solve for your IRR using this equation: 0 = -$1,000 + $1,300(1 + IRR).

If you’re doing it right, you should end up with an IRR of 0.3. That means your project will give you an annual growth rate of 30%.

Because it’s so tricky to calculate, project managers often use Excel or a project management platform capable of calculating the formula automatically to figure out the IRR.

Templates to help with your cost-benefit analysis

With all the steps and calculations you have to cover during your cost-benefit analysis, why not consider using some templates to help ensure a more thorough, consistent, and efficient analysis process? Here are five templates from monday work management that support the CBA process and ultimately lead to better-informed decision-making.

Cost-benefit analysis template

A cost-benefit analysis template can significantly streamline and enhance your CBA process.

• Standardization: Provides a consistent framework for evaluating different projects or options, ensuring all relevant factors are considered each time.
• Time-saving: Saves time compared to creating an analysis from scratch for each new project.
• Calculation assistance: Built-in formulas automatically calculate key metrics like net present value, benefit-cost ratio, and payback period.
• Visualization: Includes charts and graphs to visually represent the cost-benefit data, making it easier to interpret and present results.

RACI matrix template

Using a RACI matrix template in conjunction with cost-benefit analysis tools can lead to a more comprehensive, accurate, and well-communicated analysis, ultimately supporting better decision-making.

• Stakeholder identification: Lists all relevant stakeholders involved in or affected by the project or decision being analyzed.
• Role clarification: Defines who is Responsible, Accountable, Consulted, and Informed about different aspects of the analysis.
• Resource allocation: Estimates the time and effort required from various team members to factor into the cost analysis.
• Decision-making: Clarifies who has the authority to make final decisions about cost and benefit estimates or the overall analysis results.

Budget plan template

Using a budget plan template provides a structured, comprehensive view of project costs for your cost-benefit analysis.

• Comprehensive cost tracking: Captures all potential costs associated with a project — e.g. direct, indirect, one-time, recurring, fixed, and variable.
• Cost categorization: Analyzes the different types of expenses and their impact.
• Timeline perspective: Breaks costs down by periods — e.g. months, quarters — to help with cash flow projections.
• Scenario planning: Models different cost scenarios — e.g. best case, worst case — to assess the range of potential outcomes.

Action plan template

An action plan template can support and complement the cost-benefit analysis process.

• Resource allocation: Identifies the people, tools, and budget required and highlights potential resource constraints.
• Timeline visualization: Highlights the timing of costs and benefits over the project lifecycle.
• Responsibility assignment: Clarifies who is estimating costs and benefits for various aspects of the project.
• Performance metrics: Helps quantify and track the expected benefits identified in the CBA.

Risk register template

A risk register template can help document potential issues affecting costs and benefits in the analysis.

• Risk identification: Helps identify and document potential risks, which can inform the cost side of the analysis by highlighting potential additional expenses or setbacks.
• Risk quantification: Includes spaces to assess the probability and impact of each risk and a smart formula to help assess the risk level and costs in the analysis.
• Mitigation planning: Includes sections for risk response or mitigation strategies, which factor into the cost estimates.
• Visibility: Lets you visualize statuses in the risk register dashboard so you can control project variables and make a better cost-benefit analysis.

How to streamline your cost-benefit analysis process with monday.com

If you want to perform a quick, efficient, and correct cost-benefit analysis without the help of Albert Einstein, you’ll need an amazing Work OS with the functionality to compare your costs and benefits.

Built on top of monday.com Work OS, monday work management enables organizations to reach shared goals faster and collaboratively at scale. It helps streamline crucial business processes, such as cost-benefit analysis, and allows teams to focus on projects and everyday work. Using powerful building blocks such as automations and dashboards, teams can quickly build any workflow for any work process.

Here are 12 ways monday work management can streamline your cost-benefit analysis process:

• Project cost management template: Use the specifically designed template for cost-benefit analysis and project cost management.

• Centralized data hub: Share costs, benefits, tasks, and project decisions across the entire team in real-time from a central repository.
• Visualization tools: Utilize built-in features to create charts and graphs that visually compare potential costs and benefits side-by-side.

• Customizable boards: Set up boards to list and categorize all projected costs and benefits associated with the project.

• Automated calculations: Use built-in functionality to automatically calculate key metrics like net present value and cost-benefit ratio.
• Collaboration features: Easily share the analysis with stakeholders and get input from team members using the collaboration tools.
• Real-time tracking: Monitor ongoing costs and benefits as the project progresses and compare them to initial estimates.

• Integration capabilities: Connect with other tools and apps to import relevant financial data.

• Customizable templates: Adapt the provided templates to suit your specific project needs and industry requirements.
• Performance monitoring: Use intuitive, customizable task boards to monitor the performance of every task and activity related to the cost-benefit analysis.

• Built-in automation: Set up automated notifications for when tasks are completed or specific cost or benefit thresholds are reached.
• Easy prioritization: Use color coding and other visual cues to prioritize tasks and highlight the most significant costs and benefits.

By leveraging these features, monday work management simplifies the cost-benefit analysis process, making it more efficient, collaborative, and accurate compared to manual methods or basic spreadsheets.

It’s time to work smart

Conducting a cost-benefit analysis (CBA) is always smart before agreeing to take on a new project. It allows you to measure your projected costs against your expected benefits and determine whether the project is viable.

But if you want to perform an effective CBA without a certified genius on your team, you need a reliable platform like monday work management to help you out.

But don’t just take our word for it. 

Currently, G2 reviewers rate monday.com 4.7 out of 5. Users say the platform is easy to use, set up, and administer, with excellent customer support. Furthermore, reviewers love the easy-to-implement templates, the informative video tutorials, and the accessible help center articles.

Try monday work management yourself with a 14-day free trial and get started with our free project cost management template to conduct your cost-benefit analysis and start saving your time and sanity.

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