Topic

Cost-benefit analysis and investment appraisal

Cost-benefit analysis values both costs and consequences in money, so that a programme can be judged on whether its benefits exceed its costs. The same tools are used to appraise investments, such as net present value, internal rate of return and payback period.

Concepts in this topic

• Benefit-Cost RatioBenefit-cost ratio (BCR) is a health programme's monetised benefits divided by its costs, in present values, used to summarise a cost-benefit analysis.
• Break-Even AnalysisBreak-even analysis finds the price, effect or volume at which a health technology or service becomes cost-effective, cost-neutral or self-financing.
• Break-Even PointThe level of output or activity at which total revenue equals total cost, so an organisation neither gains nor loses money.
• Cost-Benefit AnalysisCost-benefit analysis values the costs and benefits of healthcare options in money, so they can be compared by their net benefit, usually to society.
• Incremental Net BenefitThe difference in expected net benefit between two competing interventions, found by converting the incremental health effect into money and subtracting incremental cost.
• Internal Rate of ReturnThe discount rate at which the net present value of a stream of cash flows equals zero, used to summarise an investment's return.
• Net Present ValueNet present value is the sum of monetary net flows at different times after each has been discounted to a common valuation date, including the initial flow.
• Payback PeriodThe length of time required for the cumulative cash inflows from an investment to equal its initial cost.
• Return on InvestmentReturn on investment is a monetary measure of the gain attributable to an intervention relative to its investment cost, calculated under an explicitly stated benefit, cost, time, and ratio convention.
• Shadow PriceThe implicit value of a resource with no observable market price, reflecting the opportunity cost of using it in a particular way.
• Social Return on InvestmentA framework extending conventional return on investment analysis by monetising broader social, environmental, and health outcomes alongside financial returns.