Cost-Benefit Analysis and Decision Making

A visit to your local store is a dialectic war between your wants and necessities. Sometimes you go by fulfilling your necessities and giving up on wants or vice-versa. So all the ways summing up, your shopping experience mostly remains a huge composition of satisfaction and dissatisfaction.

Cost-Benefit Analysis offers a great way to render justice to your pocket. This method of calculating benefits has been in use with many government organizations that undertake such studies in realizing the returns to their investments, particularly in the form of infrastructure development.

 Tangible Goods Benefit/Cost Ratio                             Benefits                  Cost ($)
 
Calculator     6/5 = 1.2  Can be the calculations done against not making calculations. So the benefit is marginal here which is anything more than 5$. A value of 6 can be the benefit of purchasing a calculator.          5
Television 50/100 = 0.5And150/100 = 1.5 Benefits vary in relation to the job you hold. Owning a television totally depends on the channels we optimize ourselves on.  Given that a television is viewed by a composite population giving it a swing in determining its benefit. So value extracted off is anywhere between 50 -150.      100
Car Discounting:If the car has a resale value of 7000$ after 5 years i.e. if it had depreciated at a rate of 1000$ a year  the cost c-b ratio will be 12,000/5000 =  2.4 Saves time as an option of personal transport for a few years of usage. Externalities such as resale value, time etc also weigh in. Benefit is definitely more than the price ; also considering the disadvantages of it like maintenance costs we can evaluate it just a little over its price at 12000    10,000
Computer 1000/500 = 2 Work probably demands one. Value it at 1000 as it is a lot more worthy than its price.    500

(Any value >1 determines a positive benefit over cost)

This way of analyzing benefits can also be used for our own pockets. Combining this with the budget line will help zeroing in on the goods we can buy to suit our needs and escape the quandaries of living off cheaply. Cost-Benefit ratios best describe the relationship between want and need. It makes consumption mathematical, scientific and logical. Your money is best spent on the best of the choices.

You may also like:

The Budget Line

Investments and Recession

Do we see the “Bancor” coming?

Understanding Interest Rates

Analyzing Choices While Buying

©The Idea Bucket, 2013. (Submitted by team-member, Mikky)

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