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Cost-benefit Analysis - A Handbook

NCJ Number
P G Sassone; W A Schaffer
Date Published
The fundamentals of cost-benefit analysis (CBA) are presented in terms useful to administrators who request and evaluate project appraisals and analysts who perform them.
CBA is defined as the process which identifies and evaluates net benefits associated with alternatives for achieving defined public goals. In discussing the structure of decision problems and the choice of criteria in CBA, it is advised that the net present value criterion is generally accepted as the proper decision criterion to be used in CBA. It is preferred in contrast to annual value because of its clarity and to a benefit-cost ratio because of its superiority and general applicability. Also reviewed are the several forms of decision problems, identifying the problems associated with project interdependence, and capital constraints. Methods for identifying costs and benefits are described in a separate chapter. The chapter on quantifying costs and benefits first introduces the two postulates that provide the philosophical basis for valuation in CBA. Market prices are shown, under a wide variety of circumstances, to satisfy these postulates as measures of value. In this context, a formal framework for CBA is developed, and the concept of 'shadow price' and its relation to market price is explored in preparation for the more detailed discussion of shadow pricing in the subsequent chapter. Following chapters on the discount rate, social and environmental impact analysis, and sensitivity analysis, the overall procedure for performing a CBA is described under the steps of defining the problem, designing the analysis, collecting the data, performing the analysis, and presenting the results. Mathematical equations and illustrative graphs are provided, along with a bibliography and an index.