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Abstract

Cost-benefits analysis is a powerful method of evaluating the economic merits of public sector investments. Demands by treasury departments for justification of budgets of government agencies, and new developments in measurement of non-market costs and benefits, ensure wide use. The availability of powerful computer spreadsheets with built-in financial functions has greatly facilitated the application of CBA. At the same time, the computational ease with the technique can be applied has frequently led to a rather mechanistic approach being adopted. No two projects will have exactly the same characteristics, and it is unlikely that a standardised approach to CBA can ever be relied upon. Blind use of the technique can lead to results which do not truly represent the investment situation, and to misinformation rather than good information. CBA is often inadvertently and sometimes deliberately misused. The practitioner needs to be aware of a number of complexities which often arise and to comprehend the best ways of dealing with them. To some extent, successful application of CBA is an art rather than a science, and there is no substitute for experience in carrying out real-world applications. However, there are a number of technical issues and complexities of which potential users should be aware. This discussion paper examines some of the major decisions which must be faced when carrying out CBA, then some further complexities which often arise. As well, common misuses of the technique will be considered.

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