Cost-benefit analysis (CBA) is an analytical tool for assessing and the pros and cons of moving forward with a business proposal.
A formal CBA tallies all of the planned project costs, quantifies each of the tangible benefits and calculates key financial performance metrics such as return on investment (ROI), net present value (NPV), internal rate of return (IRR) and payback period. The costs associated with taking action are then subtracted from the benefits that would be gained. As a general rule, the costs should be less than 50 percent of the benefits and the payback period shouldn't exceed 12 months.
A CBA is considered to be a subjective (as opposed to objective) assessment tool because cost and benefit calculations can be influenced by the choice of supporting data and estimation methodologies. Sometimes its most valuable use when assessing the value of a business proposal is to serve as a vehicle for discussion.
Cost-benefit analysis is sometimes called benefit-cost analysis (BCA).