2.2 Cost Benefit Analysis (CBA)

Question 1

investment

Answer 1

current commitment with consequences stretching over the future

Question 2

Private cost-benefit analysis

Answer 2

• only marketed cost benefits are considerd
• no inclusion of externalities

Question 3

Time value of money

Answer 3

Individual is indifferent between certain promise of future sum and offer to present value now

• value to money now is higher then to money in the future

Question 4

compounding

Answer 4

converting current amounts into future equivalents

Question 5

discouting

Answer 5

Inverse of compounding

Converting future amounts to current equivalents

Lowers the value of benefits and costs in the future compared to those current

Question 6

net present value (NPV)

Answer 6

NPV >= 0; then you will choose this option

influence of interest rate is important

Question 7

Internal rate of return (IRR-

Answer 7

interest rate (i) for which NPV = 0

IRR > I then you will invest in the project
- multiple solutions can exist

You earn more by investment in the project then by putting it in a savingsaccount

Question 8

Benefit-cost ratio

Answer 8

Benefit - cost ratio = NPV benefits / NPV cost

BC ratio >=1; invest in project

Question 9

payback time

Answer 9

time required for cash inflows to offset initial cash outflows (investment)

shorter payback times are preferred

Question 10

opportunity cost of capital

Answer 10

economies grow but capital is scarce

rates of return show the net benefit from investing rather then consuming;

Return most profitable - return chosen

Question 10

Environmental CBA

Answer 10

social and not commercial appraisal of investment projects

• attach monetary values to the environmental impacts (desired & undesired)
• externalities are included with the ordinary inputs & outputs
• discount rate instead of interest rate

Question 11

risk free rate of return

Answer 11

Investment with zero risk

Question 12

Ramsey equation

Answer 12

i = ro + eta*g

bundels factors into consumption rate of interest

willingness to postpone consumption now for consumption later

Calculates social discount rate/ social rate of time preferences

Question 13

cost-effectiveness

Answer 13

Achieving specified objectives at the least cost

Absolute priority to one aspect of performance

ex. trafic problems
If you want the option that saves the most hours/years you will choose a highway

Question 14

Multi-criteria analysis

Answer 14

Differing in how the evaluations on different criteria are combined to produce one single choice of option

ex. weighted average: giving a score to each aspect and then calculating average
qualititive -> quantitive, making dimensionless

Question 15

Deliberative polling

Answer 15

1. run opinion poll on the people that are affected
2. hold a discussion with respondents
3. respond again to the original survey

BUT costly; but also holds for other methods

Question 16

citizens juries

Answer 16

1. recruite citizens that are representative of th community
2. discuss issue with experts and moderates
3. compile conclusions in report or verdict (non-binding & unanimous)
4. commissioning authority is required (publishing findings, respond why not following recommendations)