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01 Nov 2013

Cost-Benefit Analysis

Cost-Benefit-Analysis (CBA) is a decision-support tool that compares the benefits and the costs associated to an investment project or a policy. In the context of ToSIA, CBA is currently used to evaluate the overall sustainability impacts of different policies on value chains, mainly forest wood chains (FWCs). The assessment involves the comparison of the status quo situation (reference future) to one or more alternatives (scenarios). The analysis focuses on the incremental costs and benefits, that is, the differences between the indicator values in the scenario and the reference future. Benefits and costs are measures in monetary terms taking individual preferences as the source of value. The resulting net benefits reflect the change in the net income of the society from undertaking the alternative. Since costs and benefits stretch over time, the usual practice  is to discount future net benefit flows to obtain present values. A project or a policy passes a CBA test  if social gains exceed social costs, that is, when the NET Present Value (NPV) of the change from the status quo to the alternative is positive.