Chapter 15: Benefit-Cost Analysis

costs

Costs come from the inputs to the project. As with the benefits, all ______ need to be considered in a BCA, even nonmarket costs.

Yes

The benefits estimates require the quantities and prices of the expected outputs of the activity. Where the change in output for marketed goods is small enough that price is not likely to change, these estimates involve multiplying price times quantity. If market price may change, it is necessary to estimate the welfare change--consumer's surplus is often sufficient. Changes affecting nonmarketed goods are likely to require methods of nonmarket valuation. Even if it is not feasible to get good estimates of the monetary value of all benefits, it is extremely important to list and included in the analysis all benefits associated with a project. What are they talking about? I don't know. Just type yes.

time, confidence

The discount rate can have a major effect on the outcome of a BCA when the benefits and costs are spread over ______. Using a range of discount rates can provide a useful sensitivity analysis on a BCA. If changing the discount rate does not affect whether the benefits outweigh the costs, then a policy maker can have more ______ in the result of the BCA.

comparison, NPV, BCR, IRR, hurdle rate, net benefits

Benefit-cost analysis involves a ______ of the benefits and costs of a project over time. Three commonly used metrics for it are the net present value, benefit-cost ratio, and internal rate of return. Ranking projects by ______ is the best way to compare mutually exclusive projects, while ______ is best for ranking priorities from a large set of potential projects. ______ uses a discount rate, called a ______ ______, to determine whether a project is worth doing. Undertaking a project with a negative NPV, or BCR less than one, requires justification on grounds other than _____ ______ to society.

Yes

Benefit-cost analysis is not an exact science. An honest BCA will avoid systematic biasing of estimates to produce a desired outcome. BCA is an efficiency tool. While it can provide info on the distribution of benefits and costs, it takes no position on what a good or bad distribution is. Public policy decisions should consider this. Preach it! Type yes.

outputs, inputs, consumer surpluses, nonmarket

Benefits come from project ______; costs come from project ______. Estimates of benefit values are likely to include ______ ______ and ______ valuation methods. Cost estimates require estimates of the labor, materials, and other expenses of undertaking the activity.

best, baseline, time

Conducting a benefit-cost analysis requires having the ______ available estimates of the benefits and costs of an activity compared with the ______ of not conducting the activity, the range of possible alternatives, the ______ of the benefits and costs, and the decision on the discount rate(s) to be used.

difference, increases, net, equal, positive

Net present value is the ______ between the present value of benefits and the present value of costs. If the NPV is positive, a project ______ net benefits. A benefit-cost ratio is the ratio of benefits to costs. A BCR greater than 1 signals that a project has positive ______ benefits. The internal rate of return for a project is an interest rate that makes the present value of the cost of a project ______ to the repesent value of the benefits of the project. If the IRR exceeds the hurdle rate (the discount rate reflecting the next-best alternative investment possibility), the project has ______ net benefits.

NPV, BCR, IRR

To evaluate whether a single project is worth doing, analysts can use NPV, BCR, or IRR. In the case of two or more mutually exclusive projects, ranking projects by ______ is the best criterion because choosing a project with higher net benefits produces more net benefits. In the case where a number of projects can be built with a fixed sum of money, ranking projects by ______ and doing them until the money runs out gives the greatest net benefits. The ______ is not a good way of comparing the returns on two different projects.