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Cost Benefit Analysis

CostBenefit Analysis

    • What Is a ?

A CostBenefit Analysis, is an evaluation of the projected costs of aproject against the benefits that they expect to accrue from theproject once it has been accomplished[CITATION Fre10 p 275 l 1033 ].The benefits expected may be in terms of monetary rewards for examplewith the 3T MRI, the benefits are the monetary rewards and theincreased servicecapabilities. All of this serves as a means of helping the managementin decision making.

A CostBenefit Analysis serves two broad purposes

  1. Provides a basis of project comparison it’s the comparison of the projects costs against their benefits, in a bid to determine between two projects.

  2. To verify whether the expected benefits of a project outweigh the costs of the project: Determine if the investment is sound feasible [CITATION Bre14 l 1033 ].

It has arelation to Cost-Effectiveness analysis but with a distinctdistinction of its monetary nature. , isconcerned with the money impact of the project and no other aspect ofthe project, while the effect is what Cost-effectiveness analysis istruly after.

Should thebenefits outweigh the costs, the project is implemented mostly at thepleasure of the deciding parties.

Every CostBenefit Analysis has three parts to it. First, you identify all costsrelated to the projected i.e. installation costs, transport costsamong others. Second, the expected value of all the benefits thatwill accrue to the project. Third, the costs are subtracted from thebenefits, and if a positive value is left, then the benefits outweighthe costs but if the value is negative, then the costs outweigh thebenefits.

    • Identifying Costs

Inthe identification of costs, there are steps that must be followed.

  1. A list of all costs that will be incurred in the project. These costs are such as cost of machine, installation cost, training costs, opportunity loss, freight costs, insurance and operational costs.

  2. Apart from the monetary costs associated with the project, there are also other factors that are to be considered. These are factors such as availability of the machine, time between order and delivery, availability of technicians for operation and repairs, operating record, machine capabilities, life cycle among many others.

  3. The various costs associated with buying a new MRI are

Cost ofmachinery – $ 2,000,000

Installationcost – $300,000

Shipping -$10,000

  1. The benefits that will accrue:

Average MRIscan per month – 10,000

Averagecost of MRI – $6000

Dye costs -$300

Techniciancosts – $400

The costsassociated with every project that are very important when it comesto making decisions are the initial project costs purchase cost,installation, training. Another important cost is operating costsdye and technician. All this costs are important to have in mind.Maintenance costs are also important. This will however depend on theterms and conditions with supplier and manufacturer.

  • Identifying Benefits

The secondpart of a Cost Benefit analysis is the Benefit part. What do we getfrom acquiring the 3T MRI scan?

    1. First, we list all the monetary benefits the hospital will get from the MRI device. These are such as reduced production cost, increased capabilities, direct profits.

    2. After our monetary benefits, we have to put in mind all the other benefits that will accrue from the MRI device. These are such as durability, increased customer satisfaction, reputation enhancement among others.

    3. Assign monetary values to the benefits identified in steps one and two.

Reducedcosts per MRI – $1500

IncreasedMRI scans per month – 3000

Costsavings – $ 100,000

Keybenefits that are important in every project are customer service andreduced costs. These two factors are key to every business surviving.Good customer service and experience is important a satisfiedcustomer will always return. Reducing costs is key to ensuring thecost of your MRI services do not go too high for your clientele toafford.

  • Evaluate Costs and Benefits

After wehave identified our costs and benefits, we then evaluate them. Theseevaluation is to determine whether it is worth to invest in the 3Ttesla MRI machine. Based on the costs of investing in the machineweighed against the benefits of the machine, it is better to acquirethe machine.

TotalCosts – $34,030,619

TotalBenefits – $81,782,213

NetBenefit – $47,751,594

Theprojected has a projected outcome of a positive benefit of$47,751,594. It is for this reason, based on the dictate of the CostBenefit Analysis, I would advise you to go ahead and acquire themachine.

For asuccessful , it is important to have fullinformation of the project in mind [CITATION McI10 p 3 l 1033 ].This means acquiring information on alternatives to the project athand, in our case, we could have a variety of MRI machines to choosefrom. From the pool based on the information gathered one would beable to make an informed decision on the project at hand. CostBenefit Analysis need not be monetary based only, it is a means ofdecision making with a wealth of alternatives to offer.

References

Brent, R. J. (2014). Cost-Benefit Analysi and Healthcare Evaluations (Second ed.). Northampton, Massachusetts: Edward Elgar Publishign Limited.

Free, R. C. (2010). 21st Cetury Economics: A Reference Handbook. Thousand Oaks: SAGE Publications.

McIntosh, E. (2010). Introduction. In E. McIntosh, P. M. Clarke, E. J. Frew, &amp J. J. Louviere (Eds.), Applied Methods of Cot-Benefit Analysis in Health Care (p. 1). New York: Oxford University Press.