How do you align a cost-benefit analysis with the strategic goals and objectives of an organization?

2 Identify and quantify the costs and benefits

The next step is to identify and quantify the costs and benefits of each alternative. Costs are the negative consequences or sacrifices that result from choosing an alternative, while benefits are the positive outcomes or gains that result from choosing an alternative. Costs and benefits can be both tangible and intangible, and can occur at different times and to different stakeholders. You need to estimate the magnitude, timing, and probability of each cost and benefit, and convert them into a common unit, such as money, using appropriate methods and assumptions. You also need to account for the opportunity cost, which is the value of the next best alternative that is forgone when choosing an alternative.

3 Apply the discount rate and calculate the net present value

The third step is to apply the discount rate and calculate the net present value (NPV) of each alternative. The discount rate is the rate of return that you expect from investing in an alternative, or the rate of interest that you pay for borrowing money to finance an alternative. It reflects the time value of money, which means that a dollar today is worth more than a dollar in the future. The NPV is the difference between the present value of the benefits and the present value of the costs of an alternative. It represents the net benefit or net cost of choosing an alternative in today's terms. The higher the NPV, the more attractive the alternative.

4 Perform the sensitivity analysis and compare the alternatives

The fourth step is to perform the sensitivity analysis and compare the alternatives. The sensitivity analysis is a way of testing how the results of the CBA change when you vary the key parameters, such as the discount rate, the cost and benefit estimates, or the probability distributions. It helps you assess the robustness and reliability of the CBA, and identify the sources of uncertainty and risk. You can use different methods, such as scenario analysis, break-even analysis, or Monte Carlo simulation, to perform the sensitivity analysis. Based on the sensitivity analysis, you can compare the alternatives and rank them according to their NPV or other criteria, such as the benefit-cost ratio, the internal rate of return, or the payback period.

5 Communicate and document the results and recommendations

The final step is to communicate and document the results and recommendations of the CBA. You need to present the main findings, assumptions, limitations, and implications of the CBA in a clear, concise, and transparent way. You need to use appropriate formats, such as tables, charts, graphs, or narratives, to convey the information and support your arguments. You also need to document the data sources, methods, calculations, and references that you used in the CBA, and provide enough details for others to replicate or verify your analysis. By communicating and documenting the results and recommendations of the CBA, you can demonstrate how your CBA aligns with your organization's strategic goals and objectives, and how it can inform and improve your decision-making.