Chapter 10, Problem 11AA

To determine

To state: The steps involved in the cost benefit analysis and the reasons for which business think of it while expanding the business.

Explanation of Solution

The list of steps in the cost benefit analysis are as follows:

1. To evaluate the cost of the project or the initial investment
2. Calculate the revenues that are expected to realize.
3. Calculate profits
4. Calculate interest on loan taken for the project
5. Check profits v/s costs. If the cost is more than the profits, one should not accept the option. If profits are more than the costs, option should be accepted.

Business think about cost benefit analysis when they think about expanding because that will give them a clear picture whether the expansion is beneficial for the company or not and accordingly, they can take decisions regarding acceptance of such expansion project.

Economics Concept Introduction

Introduction: Cost benefit analysis helps to choose a better option for a business by analyzing the benefit caused from a particular cost.