5. Applying Cost-Benefit Analysis in Practice

5.1 Introduction: From Framework to Real-World Application

Cost-Benefit Analysis (CBA) becomes truly meaningful when applied to real-world decisions, where trade-offs are complex and resources limited. This chapter moves from theory to application, showing how the structured steps of CBA are used to evaluate a concrete policy challenge. By walking through a realistic example, it demonstrates how analytical tools translate into practical insights for public investment planning—bridging the gap between economic reasoning and effective decision-making.

In the previous chapter, we outlined the eight-step process involved in conducting a robust Cost-Benefit Analysis (CBA), covering everything from defining objectives and identifying alternatives, to valuing costs and benefits, and assessing distributional impacts. While that chapter focused on the framework, this chapter demonstrates how those steps are applied in practice through a hypothetical case study in the public safety sector.

Problem Statement

The existing emergency communication system is outdated and fragmented. First responders face coverage gaps, unreliable transmission, and limited interoperability between agencies, all of which delay critical responses and reduce public safety.

5.3. Step 2 – Identify Alternatives

This step involves identifying a set of feasible intervention options that could achieve the project’s objectives—namely, to enhance the performance, reliability, and equity of the emergency communication system. The selected alternatives represent a range of technical, operational, and financial strategies, each with different levels of investment, complexity, and expected impact.

The four options proposed are deliberately structured to reflect both incremental improvements and comprehensive upgrades, allowing for comparison between low-cost, quick-win solutions and larger-scale infrastructure transformations. The list includes standalone infrastructure upgrades (Options 1 and 2), a non-capital-intensive training program (Option 3), and a combined approach that addresses both system and staff capacity (Option 4).

These options were chosen to provide a realistic and policy-relevant range of scenarios that a public agency might consider, given practical constraints around budgets, urgency, and institutional readiness.

Four intervention options are proposed:

1. Option 1: Full Implementation of a Digital Radio System

2. Option 2: Upgrade the Existing Analog System

3. Option 3: Introduce Advanced Training for Existing Infrastructure

4. Option 4: Hybrid System – Combine Digital Upgrade and Training

5.4. Step 3 – Identify and Describe All Costs and Benefits

In this step, we identify all the relevant costs and benefits associated with each intervention option. This includes both initial (capital) and ongoing (operational) costs, as well as the expected benefits in economic terms. For a robust analysis, it is important to consider the full range of costs and benefits, whether tangible or intangible, direct or indirect.

Costs may include infrastructure investment, training, and ongoing maintenance or operational expenses. Benefits, on the other hand, may come in the form of reduced emergency response times, improved coordination across agencies, and savings from avoided losses (such as property damage, injury, or system downtime).

The following breakdown provides a simplified estimate of annual and one-time costs and benefits for each option. These values will later be forecast over time (Step 4) and converted into present values (Step 5) to determine each option’s overall value to society.

Option 1: Digital Radio System

• Costs: $3.5 million upfront (infrastructure); $250,000/year (O&M); $500,000 (training)

• Benefits: $1.2 million/year (from faster response, reduced damages, and improved coordination)

Option 2: Analog Upgrade

• Costs: $2 million upfront; $200,000/year (O&M); $300,000 (training)

• Benefits: $850,000/year

Option 3: Advanced Training Only

• Costs: $600,000 (program development + delivery)

• Benefits: $450,000/year (improved use of existing system)

Option 4: Hybrid (Digital + Training)

• Costs: $3.8 million upfront; $250,000/year; $600,000 training

• Benefits: $1.4 million/year

Summary of Estimated Costs and Benefits for Each Option

5.5. Step 4 – Forecast All Quantifiable Costs and Benefits

Forecasting is a critical component of CBA that involves estimating when and how costs and benefits will occur over the project’s lifespan. The goal is to generate a realistic timeline of financial flows that reflects how the investment is expected to perform in the real world.

For this case study, a 10-year forecast period has been adopted. This duration was selected because it captures the typical lifecycle of communications infrastructure investments, allowing for a meaningful analysis of both immediate and long-term effects without projecting too far into uncertain future conditions.

All four options assume that the intervention (e.g. infrastructure deployment or training) is completed in Year 0, with benefits beginning to accrue from Year 1 onward. Benefits and operational costs are assumed to remain constant in real terms, reflecting a neutral assumption of no inflation or performance decline. Capital and one-time training costs are incurred upfront, while operations and maintenance (O&M) costs recur annually.

Although the model assumes even annual benefits, in real-world scenarios, benefits may ramp up over time or vary depending on usage and system maturity. However, a constant stream simplifies the analysis and is considered a conservative approach.

While more complex CBAs may incorporate probability-based scenarios or Monte Carlo simulations to handle uncertainty, this case study uses a deterministic approach with single-value forecasts. Sensitivity analysis in Step 6 later helps account for variation in key assumptions.

To convert future costs and benefits into their present-day equivalents, we use the present value (PV) formula, a fundamental tool in Cost-Benefit Analysis. This formula accounts for the time value of money, recognising that a dollar received in the future is worth less than a dollar today.

In this case study, we are working with repeating annual benefits over a 10-year period, which is a common pattern in infrastructure investments. To simplify the calculations, we use the present value of an annuity formula, which gives us a multiplier (7.722 at 5%) to apply to any constant annual amount. This allows us to estimate the total present value of benefits or costs that recur evenly over time.

5.7. Step 6 – Assess Net Benefit and Sensitivity Analysis (7% Discount Rate)

5.8. Step 7 – Distributional and Equity Impacts

5.9. Step 8 – Report Results and Recommendation

Summary of Key Results

The table above presents a comparative summary of each option’s Net Present Value (NPV), Benefit-Cost Ratio (BCR), and equity implications. Each option delivers positive economic value, but with varying degrees of effectiveness, impact, and alignment with social inclusion goals.

Option 4 (Hybrid System) stands out as the strongest overall performer. It generates the highest NPV at $3.88 million and a BCR of 1.56, indicating a strong return on investment. Importantly, it combines infrastructure improvement with personnel training, resulting in comprehensive system gains and broad-based benefits across diverse stakeholder groups. From both an efficiency and equity perspective, it delivers the most well-rounded impact.

Option 3 (Advanced Training Only) demonstrates the highest BCR at 5.79, suggesting exceptional cost-effectiveness: for every dollar invested, nearly six dollars in benefits are returned. However, its NPV ($2.87 million), while strong, is lower than Option 4, and the option’s scope is narrower. Since it does not improve the physical communication infrastructure, its benefits are limited to better usage of existing systems. It is particularly appealing in low-resource settings or as a phased first step.

Option 1 (Digital System) delivers a solid NPV of $2.84 million and a BCR of 1.44, confirming its economic viability. It offers significant improvements in communication quality and response times, especially for vulnerable and underserved communities. While slightly less efficient than the hybrid option, it remains a compelling investment, particularly where equity-driven outcomes are prioritised and a full training overhaul is less feasible.

Option 2 (Analog Upgrade) presents the lowest NPV ($1.72 million) and BCR (1.35) among the four options. It offers a modest improvement over the status quo, with lower costs and minimal disruption. While it may be a practical solution where budget constraints or institutional barriers prevent more ambitious upgrades, its transformative potential is limited, and long-term gains may be outpaced by growing system demands.

Recommendation

Option 4 (Hybrid System) is recommended as the optimal choice, providing the highest net benefit, strong resilience under sensitivity analysis, and the most balanced outcome in terms of economic value and social equity. While Option 3 shows an impressive BCR, it lacks the system-wide improvements delivered by infrastructure investment. Option 1 is a strong runner-up if funding constraints make the hybrid model less feasible.

Based on the results of the cost-benefit analysis, Option 4 (Hybrid System) is recommended as the preferred investment strategy. It delivers the highest Net Present Value (NPV) of $3.88 million, coupled with a strong Benefit-Cost Ratio (1.56), indicating both substantial total value and cost efficiency. Importantly, Option 4 also offers the most balanced outcome across all evaluation dimensions: financial return, operational performance, risk resilience, and social equity.

By integrating both infrastructure improvements and personnel training, this option enhances the technical capacity of the emergency communication system while also building the human capital needed to fully realise those gains. This dual investment leads to broader, longer-lasting impacts—particularly in regions and communities where current communication systems are inadequate or inconsistent. The hybrid approach also demonstrates resilience under sensitivity analysis, maintaining a positive NPV of $2.91 million even when tested at a higher 7% discount rate.

While Option 3 (Advanced Training) offers the highest BCR (5.79), its impact is narrower in scope. It excels in cost-efficiency but lacks the transformational potential of infrastructure investment. It may be considered a valuable complementary measure or interim solution in resource-constrained contexts, particularly where rapid improvements are needed without major capital expenditure.

Option 1 (Digital System) is a strong alternative, especially in terms of improving service to vulnerable and underserved populations. If the full hybrid option proves fiscally or logistically unfeasible, Option 1 may serve as a viable fallback, still offering a high NPV and positive social return.