Application: Time-Value Formulas and Cost-Benefit Analysis
Governments are concerned primarily with real prices rather than “shadow prices,” or prices that have been “assigned” to intangible costs and benefits. A major budget management function is cost-benefit analysis. When coupled with the use of time-value formulas, decision making related to operational expenditures is facilitated. Cost-benefit analysis is a means of evaluating all costs on a dollar basis, even those costs that do not have a dollar value attached to them. After all other calculations have been made, the analysis needs to conclude with the calculation of the ratio between costs and benefits. The results aid decision makers in considering multiple avenues for expenditure. This week, you practice the principles and related formulas of time- (present) value and cost-benefit analysis.
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