Cost Benefit Analysis Primer

Published Dec 2005
Page updated 30 Nov 2011

Version 1.12

This primer seeks to improve the quality of policy and spending proposals by providing guidance on the issues that should be considered and how proposals will be assessed by the Treasury. It is intended for public sector policy and financial analysts and provides simple, accessible and practical assistance. The Primer presents an overview of Cost Benefit Analysis in a New Zealand public sector context, with particular emphasis on the basic questions that are likely to arise.

Improving the Primer

Treasury is currently revising the Primer with the aim to make it more useful to practitioners. We would welcome your suggestions for improving the Primer. Please send your ideas to CBAPrimer@treasury.govt.nz.

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Executive Summary 1 Introduction 1.1 When to use this Primer 1.2 Cost Benefit Analysis 1.3 Proportionality of Analysis 1.4 When to conduct Cost Benefit Analysis? 1.5 Relationship to other guidance 2 Identifying and Estimating Relevant Costs and Benefits 2.1 Establish the Assumptions and Scope 2.2 Period of Analysis 2.3 Identifying Benefits and Costs 2.4 Valuing Relevant Costs and Benefits 2.5 Concluding Comments 3 Analysing the Options 3.1 Cashflows 3.2 Discounting and Discount Rates 3.3 Choosing a Discount Rate 3.4 Net Present Value 3.5 Equal Proposal Lives 3.6 Alternative Decision Guidance Methods 4 Assessing Risk, Uncertainty and Intangibles 4.1 Risk and Uncertainty 4.2 Optimism Bias 4.3 Sensitivity Analysis 4.4 Scenario Analysis 4.5 Intangibles 4.6 Multi-Criteria Analysis 4.7 Concluding Comments 5 Selection and Presentation 5.1 Pulling It All Together 5.2 Selecting the Preferred Option 5.3 The Relationship Between CBA and Fiscal Impacts 5.4 Tips and Traps 5.5 Concluding Comments Bibliography Glossary Annex 1: Monte Carlo Analysis	cba-primer-v12.pdf (326 KB) pp. 52

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Cost Benefit Analysis Primer

Improving the Primer

Table of Contents

Executive Summary

1 Introduction

2 Identifying and Estimating Relevant Costs and Benefits

3 Analysing the Options

4 Assessing Risk, Uncertainty and Intangibles

5 Selection and Presentation

Bibliography

Glossary

Annex 1: Monte Carlo Analysis