Difference between Cost Benefit Analysis and Capital Budgeting Appraisal

Cost benefit analysis is mainly used in the public sector while capital budgeting investment appraisal is mainly used by the private sector.

Benefit Cost Analysis

Cost benefit analysis in the public sector is used due to the rising public investment. It involves comparison among various public investments in terms of costs and benefits. In this case, the benefits and costs of each alternative are analysed, and the project with the highest positive difference between benefits and costs is selected (Feldstein, 2007). In other words, the public sector investment alternative with more benefits than costs is selected. The benefits that may be analysed include health, safety, equality and ethical outcome of the investment while costs include pollution, injuries and ill-health caused to the public by the public investment. Therefore, the cost benefit analysis includes both economic and social benefits and costs.

Capital Budgeting Investment Appraisal

On the other hand, capital budgeting involves economic factors in terms of capital expenditure used on a particular private project and its resultant income from the project. In this case, the monetary costs of each investment alternative are added up and subtracted from the income. The project with higher positive difference between revenue and costs is chosen (Feldstein, 2007). Some capital investment appraisal methods include Accounting Rate of Return, Investment Rate of Return, Net Present Value, Payback period, Weighted Average Cost of Capital and Adjusted Present Value.

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