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What is Cost-Effectiveness Analysis?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 23 June 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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A cost-effectiveness analysis, or CEA, is a process that makes it possible to compare the costs associated with at least two courses of action, as well as the probable outcomes of those actions. With this type of evaluation, the focus is less on the amount of money spent, and more on the effect that is produced by the actions, much like the cost-utility analysis. This helps to set the process apart from the similar cost-benefit analysis, where there is more emphasis on the amount of resources expended for each outcome, going as far as to assign a monetary value to the benefit achieved. Making a comparison of this type helps businesses as well as investors decide which course of action would be the best choice over the long term.

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When employed in a business setting, a cost-effectiveness analysis can make it much easier to determine which actions will allow the company to achieve a desirable end and generate the most overall benefit as part of the process. The approach can be applied to any portion of the operation, from structuring the management team to settling on the best product delivery options. For example, conducting an analysis to compare what would happen if a contract were signed with one trucking firm rather than another is likely to not just demonstrate the monetary benefits of making a particular choice. The cost-effectiveness analysis may also identify other effects or benefits, such as more deliveries on time, increased customer satisfaction with the delivery process, and a wider delivery network without the need to interline with other trucking firms to complete deliveries.

A properly executed cost-effectiveness analysis can save a company a great deal of money, while also allowing the business to make use of labor, facilities, and other resources to better effect. There is the potential to avoid cost overruns that ultimately lower profits, as well as prevent the accumulation of too much inventory. The right approach to the analysis can even keep the business from investing money in products or the opening of new facilities that ultimately are not in the best interests of the company.

When it comes to investing, conducting a cost-effectiveness analysis can make it easier to decide which of two apparently excellent stock options would be the best fit for the individual investor. Here, the focus is not just on the return each option would generate. Factors such as how well the stock option is likely to perform over the long-term, the rate of volatility, the interest of the investor in the company issuing the shares, and the way that each stock option fits into the investor’s financial goals will also be explored. As a result, the investor can choose the option that is likely to generate the most satisfaction for the longest period of time.

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