Cost-benefit analysis

Cost-benefit analysis (or rate-of-return analysis, which is the type of cost-benefit analysis most frequently applied to education) provides a means of appraising these future benefits in the light of the costs that must be incurred in the present. The purpose of the analysis is to provide a measure of the expected yield of the investment as a guide to rational allocation of resources. Thus any private businessman who is contemplating investing in physical machinery must make a cost-benefit calculation to assess the likely profitability of the investment. In recent years, economists have paid increasing attention to the application of cost-benefit analysis to public investment and sophisticated techniques have been developed for measuring the costs and benefits of, for example, water resource and transport projects. Such projects are clearly analogous to private investments in physical capital and it is not surprising that techniques that are useful to the businessman should also prove useful to governments in making investment decisions (Woodhall, 2004: 24).