The value of cost-benefit analysis: when is the investment recovered?

The correct answer: B. When the accumulated benefits will pay back the investment

✅ Why this answer

The value of a cost-benefit analysis (CBA) is determining the payback period: how long it takes until accumulated benefits equal the costs and net profit begins, that is, when the organization sees a real financial benefit. This is the heart of the investor’s question: “When does this money come back?”

❌ Why the other options are wrong

• The implementation time in months (A): a schedule question (the project plan and Gantt chart). The trap is confusing the two durations: the time to build is not the time to pay back after go-live.
• The number of staff over the system’s life (C): workforce planning; one of the cost inputs, not the analysis’s output.
• Total expenses without considering benefits (D): half the equation; listing costs alone is a cost estimate, and the analysis has a compound name: costs versus benefits.

💡 Key concept

The cost-benefit analysis (CBA) system: costs and benefits year by year → discounting to present value → cumulative net present value → the payback period → and the final check: do benefits equal or exceed costs?

Each question has its indicator: net present value (NPV) for comparing projects (a related question in the full bank), return on investment (ROI) for the ratio, and the payback period for speed.

In the exam: the question “when does this money come back?” is answered by the payback period, and that is the value a cost-benefit analysis gives the decision maker. How long implementation takes is a schedule question, and a list of expenses alone is a cost estimate, not an analysis.

🔗 Related facts and questions

• The payback period: the simple one equals the cost divided by the net annual benefit.
  Practice question: a project costs $2 million and yields a net benefit of $500,000 per year. What is the simple payback period? → 4 years. The discounted one is longer, because the benefits of later years are discounted to their present value (a related question in the full bank).
• Return on investment (ROI): the net benefit divided by the cost, written as a percentage: (benefits − costs) ÷ costs × 100.
  Practice question: a system has a total cost of $2 million and total benefits over five years of $3 million. What is the return on investment? → 50%: (3 − 2) ÷ 2.
• Net present value (NPV): the sum of discounted benefits minus the sum of discounted costs. A positive value means the project adds value; a negative one means its discounted benefits are less than its costs.
  Practice question: two projects cost about the same: the first has a net present value of plus $300,000, and the second of minus $50,000. Which comes first financially? → The first.
• Tangible and intangible benefits: tangible benefits are measured in money, such as less overtime or fewer denied claims. Intangible ones, such as patient satisfaction and staff morale, are named and described in the analysis even when they are hard to price; they are not left out.
• Total cost of ownership (TCO): the cost side of the analysis is not the purchase price alone. It includes implementation, training and data conversion, then annual maintenance, upgrades and staff over the whole life of the system.
  Practice question: the first vendor’s license is cheaper, but its annual maintenance is higher over seven years of use. Which figure are the two bids compared on? → The total cost of ownership over the system’s life, not the purchase price.
• The payback period and the life of the system:
  Practice question: the analysis shows a payback period longer than the system’s useful life. What is the decision on financial grounds? → Reject or restructure; the system would reach the end of its life before it recovers its cost.