Previous article
Next article

Cost-benefit Analysis Are Used to Assess the Attractiveness of Investments

Investments or single business cases need to be evaluated based on a certain set of criteria. Since financial performance is the key criterion in a case interview, you need to have an idea about future financial impacts. A key tool to assess this impact is the cost-benefit analysis, which is used to determine the net effect of potential revenues and costs. In the case of multiple options, this net effect can be considered as opportunity costs of an option.

A thorough cost-benefit analysis of all available alternatives is the foundation of every decision

Solving a case is a lot about coming up with hypotheses and then testing your ideas. If you have several ideas, you have to base your decision on analysis. Cost-benefit analysis helps you evaluate your ideas with respect to 1) feasibility and 2) relative attractiveness (comparisons, benchmarking).

  1. The feasibility analysis covers quantitative and qualitative aspects:
    • The quantitative aspect: Check the consequences of your decision quantitatively. E.g., determining the number of customers or prices, leading to the calculation of revenues and costs, and the corresponding profitability of the idea.
    • Qualitative aspect: This might be more important in the final decision-making. E.g., the culture of the firm. Remember that even though it is more critical to quantify the business idea/decision in terms of profitability, you must not ignore the qualitative aspects, which often give insights about the implementation of decisions/ideas.
  2. Relative attractiveness is extremely crucial. Evaluate various options using a cost-benefit analysis, compare them all and pick the most attractive one in terms of financial benefits and risks (qualitative aspects).

From a financial aspect, although it is usually neglected as it mathematically complicates the case solution, you can make your analysis more precise by applying the discounting concept to future income or cost streams. This is especially appropriate in the case of highly volatile streams that occur in the distant future. In such cases, the net present value as the output of your cost-benefit analysis is the best metric on to base your decision on.

Apply the cost-benefit concept in every case, in which you need to make decisions

The cost-benefit framework is the basic tool for valuation and M&A cases and you probably already apply it intuitively here. In addition, it works well for questions with a broad array of possible solutions. For example, “how can we achieve more revenue/growth”-questions, market entry cases, new product cases, among others. This way, you transform the question into a profitability case.

Example: You have an ice-cream parlor and now you are looking for further revenue options.

Among other options, one is to use an ice cream truck. Assume the truck is used during the summer season of about 5 months or 150 days.

 

type-conversion-1677682669-fsipu5n4512n.webp

Key takeaways

  • Use a cost-benefit analysis as a framework to check feasibility and compare options.
  • Use quantitative and qualitative cost-benefit analysis to show competency in both aspects.
  • If you have time left, try to quantify qualitative data.
Previous article
Next article
Do you have questions on this article?
Contribute to our Q&A forum and ask the community your question!

Questions on This Article

Loss of marketing gains due to bad weather

Case Interview cost-benefit analysis
Most recent answer on Jan 16, 2021
Rong asked on Aug 08, 2019
Shall we also consider the loss of marketing gains due to bad weather?
2
Answers
2.9 k
Views
0
Total Upvotes
on Jan 16, 2021 on Jan 16, 2021
Last Activity

Related Cases

Our client, GamingHub, is a large diversified entertainment corporation that received a request to approve a $200 m capital allocation from its video game manufacturing division. The division wants to triple the capacity.The client hired us to help him decide if he should approve this capital reques ... Our client, GamingHub, is a large diversified entertainment corporation that received a request to approve a $200 m capital allocation from its video game manufacturing division. The divisio ... (Open whole case)
10.8k
Times solved
4.2
800+ Ratings
Intermediate
Difficulty
Expert case by Ian
Our client is Yoda's Phones, a national telecommunications company. They have embarked on a three-year, multi-million dollar digitization program. Unfortunately, two years into the program, they realize they are significantly behind schedule and over budget.You have been brought in to right the ship ... Our client is Yoda's Phones, a national telecommunications company. They have embarked on a three-year, multi-million dollar digitization program. Unfortunately, two years into the program, ... (Open whole case)
9.4k
Times solved
4.5
< 100 Ratings
Intermediate
Difficulty
Expert case by Ian
Sky China, a government-backed Chinese airline, has recently seen profits plummet due to COVID-19. Profits are down 80% in the months of February and March, but are showing early signs of a rebound in April. They've brought you in to first investigate what can be done immediatedly to prevent he ... Sky China, a government-backed Chinese airline, has recently seen profits plummet due to COVID-19. Profits are down 80% in the months of February and March, but are showing early signs of a ... (Open whole case)
7.3k
Times solved
4.3
100+ Ratings
Intermediate
Difficulty
Expert case by Ian
Our client is Energy England, one of northern England’s largest electric utility companies. They were created over the past decade through an aggressive series of mergers of existing utility companies each specializing in a single energy generation source.Recently, the CEO has embarked on an initiat ... Our client is Energy England, one of northern England’s largest electric utility companies. They were created over the past decade through an aggressive series of mergers of existing utility ... (Open whole case)
7.1k
Times solved
3.9
< 100 Ratings
Intermediate
Difficulty
Our client is a Chinese publisher called AnimeCo who is looking to publish a new book based on the popular Anime series Little Panda. This series has been highly popular in China with millions of viewers every day and the publisher is looking to capitalize on this potentially.They have asked us to p ... Our client is a Chinese publisher called AnimeCo who is looking to publish a new book based on the popular Anime series Little Panda. This series has been highly popular in China with millio ... (Open whole case)
5.2k
Times solved
4.3
300+ Ratings
Beginner
Difficulty
How likely are you to recommend us to a friend or fellow student?
0
1
2
3
4
5
6
7
8
9
10
0 = Not likely
10 = Very likely