The evaluation of a proposed activity by determining the value of the anticipated benefits compared to the costs incurred, ensuring a financially attractive decision when benefits exceed costs. It’s essential to also consider non-financial factors and the potential disparities in who benefits and bears the costs.
Capital budgeting, also known as capital investment appraisal or investment appraisal, is the process by which an organization evaluates different investment projects to determine which is likely to provide the highest financial return.
Cost-Benefit Analysis is a technique used in capital budgeting that evaluates the estimated costs against the expected benefits of a proposed investment.
Cost-effectiveness refers to the ability to generate sufficient value to offset the associated costs of an activity. In a business context, this value is often interpreted as revenue.
Externalities are costs or benefits that affect third parties who did not choose to incur those costs or benefits, often a consideration in economics and public policy.
In real estate appraisal, incurable depreciation occurs when the cost to correct a defect exceeds the benefit gained from the repair, making it uneconomical to spend on the repair.
Opportunity cost is the economic cost of an action measured in terms of the benefit foregone by not choosing the next best alternative. It plays a critical role in decision-making by considering the returns that could have been earned through alternative investments or actions.
A trade-off involves giving up one benefit or advantage to gain another that seems more favorable. This concept is prevalent in various decision-making processes where resources such as time, money, and effort are limited. Trade-offs are a fundamental aspect of economics, business strategy, and personal decision-making. For example, investing in education might involve a financial loss in the short term but yield higher earning potential in the future.
