As is germane to the topic of risk management, a cost benefit analysis (CBA) is used to consolidate, assess and proffer the costs and benefits, and the intrinsic aspects of a project.
A CBA is primarily performed to ascertain if a project decision is a prudent one. The project feasibility is usually stated in monetary terms, as it’s metric i.e., system or standard of measurement. Thus the total calculated expenditure of the project is scrutinized against the total forecasted benefits, to see whether the benefits outweigh the costs, and if so, by what financial amount.
To illustrate the point,we will utilize Courtney’s annualized loss expectancy (ALE) formula (Suh & Han, 2002), which has been adopted by the US government for risk analysis. The (ALE) is determined by multiplying the annual rate of occurrence (ARO) by the single loss expectancy (SLE), and is expressed thusly:
ALE = ARO * SLE
At a site that we support, there are 20 laptops that are used in mobile labs, the laptops are valued at $1000 each, and the 2 carts that are used to store them, cost $500 each. In addition each laptop has Computrace tracking software that is billed at $50 / annually. The risk of theft or (SLE) is 10%.
Thus the (ALE) for all the laptops is: $2,200 = 10% * $22,000
The (ALE) for one laptop would be $1,100, which is more than the value of the laptop.
Given the amortization or reduction in value over time, of the laptop, with a constant (ARO) and (SLE), then cost-benefit wise, the existing method of securing the laptops, does not make sound fiscal sense, and causes the (ALE) to rise.
Then too, cost–benefit estimates may be skewed by the lack of objectivity on the part of the individuals affected by the analysis. We try to share with the director of the program that the laptop hardware / software specs have cause the laptops to lose value, but their perception is that since the laptops were rarely used, that they maintain their day-one value.
Another way to quantify cost-benefit values is through the following formula:
Costs ÷ Benefits > 1DF
If the costs of performing a project are markedly disproportionate to the benefits of that project, then it would not be prudent to proceed with that project. DF denotes a disproportion factor; therefore as DF rises above one, going further with the project becomes less advisable.
Suh, B. , & Han, I. (2002, December). The IS risk analysis based on a business model. Graduate School of Management, Korea Advanced Institute of Science and Technology,, 207-43.