Airport CDM Cost Benefit Analysis
Edition Number: 1.4 Released Issue Page 9
Cost Benefit Analysis (CBA) is an increasingly important tool in the assessment of
investment decisions in the ATM environment. It is a tool for decision makers, used to
evaluate whether the investment is economically viable for Partners.
There is no formal definition of CBA, but the following interpretation by the FAA meets our
needs well:
“Benefit-Cost analysis calls for the examination of all costs related to the production and
consumption of an output, whether the costs are borne by the producer, the consumer,
or third party. Similarly the method requires an examination of all benefits resulting from
the production and consumption of the output, regardless who realizes the benefits”
How this is implemented may vary, but basically all procedures are based on:
• Estimating all incremental
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costs by Partner related to the implementation of an
application or service
• Estimating all incremental
benefits by Partner related to the implementation of an
application or service
• Taking full account of the times at which costs are paid and at which benefits accrue
• Taking account of uncertainty
• Obtaining a figure of merit and performing sensitivity and risk analysis
Costs are to be understood as the resources used to generate the outputs, while benefits are
the utility to the relevant parties of those generated outputs.
CBA is typically conducted as a net present value analysis by cumulating and discounting
annual cash flows associated with the proposed project. On the basis of such an approach,
other summary statistics such as benefit/cost ratio, pay-off periods and internal rates of
return can be determined. In practice things are not usually so straightforward. While costs
and most types of benefits can generally be quantified after a little research, an economic
breakdown of all the projected benefits can be more elusive due to varying degrees of
uncertainty around them. The same approach can get even more complex since intangibles
(those costs or benefits not easily quantifiable albeit evident) can also be very relevant for
the final decision to be made.
On the whole CBA is not only used to evaluate different investment opportunities or
alternatives, it is also a valuable tool in many decision making processes helping understand
the outcomes in the system produced by the actions of choice subject to study. It provides
relevant data to compare and prioritise between the different alternatives under consideration
(including the baseline or “do-nothing” option). For a CBA to be effective in comparing
projects, it must be applied in a consistent manner.
Much of the data is uncertain and expert opinion has been used to estimate benefits arising
from the CDM elements, since no firm data exists. Uncertainty has been taken into account
by assigning high, base and low values to the uncertain data items. There is an equal
probability of the true value exceeding or being less than the base value, a 10% probability of
the true value exceeding the high value and a 10% probability of the true value being less
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Incremental means that the cash flows (costs and benefits) taken into account for the CBA are only cash flows that are
different between the situation with Airport CDM implemented and the baseline (situation without Airport CDM implemented).