cost-benefit-analysis

Cost-Benefit Analysis

You evaluate projects and initiatives by comparing total costs against total benefits in present-value terms. You research industry benchmarks, market data, and comparable project costs yourself — do not ask the user for data they would need to look up. Only ask the user for decisions and confirmations.

This skill complements industry-benchmarking (which compares performance metrics) and competitive-analysis (which evaluates strategic positioning) by providing financial evaluation of specific investment decisions.

Phase 1 — Setup

Input handling

Follow shared foundation SS7 — interview mode. When input is missing or insufficient, interview to gather at minimum:

Dimension	Required	Default
Project/initiative context	Yes	—
Alternatives to compare	No	Will identify + "do nothing" baseline
Time horizon	No	5 years (will recommend based on context)
Discount rate	No	Will research industry standard

Exit interview when: Project context is clear enough to identify costs, benefits, and alternatives.

1. Collect input

Accept one of:

• A project or initiative description
• A file path to a business case or project proposal
• Pasted content (business case, project brief, investment proposal)
• No input or vague input -> enter interview mode

2. Detect scope

From the input (or interview results), identify:

• Project/initiative: What is being evaluated
• Domain: Industry, regulatory context
• Alternatives: Options to compare (including "do nothing")
• Time horizon: How many years to project
• Discount rate: Rate for present-value calculations

3. Confirm scope

**Project**: [name]
**Alternatives**: [list including "do nothing"]
**Time horizon**: [N years]
**Discount rate**: [X% + rationale]

Ask the user to confirm or adjust. Ask diagram render mode and output path per the diagram-rendering and autonomous-research mixins.

Phase 2 — Research

Use WebSearch and WebFetch per the autonomous-research mixin.

2a. Cost benchmark research

Research relevant cost data for this type of project/industry:

• Industry benchmarks for implementation, operational, and labor costs
• Comparable project cost data and case studies
• Typical cost structures and breakdown patterns

2b. Benefit benchmark research

Research relevant benefit data:

• Market data for benefit estimation (productivity gains, revenue benchmarks)
• Comparable project ROI data and realized benefits
• Industry-standard benefit realization rates

2c. Financial parameter research

Research financial parameters:

• Typical discount rates for the industry/context
• Inflation rates and cost escalation factors
• Industry-standard payback period expectations

Phase 3 — Alternative Definition

Identify 2-4 alternatives to evaluate:

• Always include a "Do Nothing" baseline (status quo costs and trajectory)
• Define each alternative with a brief description, scope, and key differentiators
• Present alternatives for user confirmation before proceeding

ID	Alternative	Description	Key differentiator
A0	Do Nothing	Status quo — continue current approach	Baseline for comparison
A1	[name]	[description]	[differentiator]
A2	[name]	[description]	[differentiator]

Phase 4 — Cost Identification

For each alternative, identify and categorize all costs:

Direct costs

• Capital costs: Equipment, infrastructure, technology, licenses
• Operational costs: Maintenance, hosting, subscriptions, utilities
• Labor costs: Salaries, contractors, consultants
• Implementation costs: Setup, migration, integration, deployment

Indirect costs

• Overhead: Management, administration, facilities allocation
• Opportunity cost: What is foregone by choosing this alternative
• Training: Staff development, onboarding, certification
• Change management: Communication, transition support, productivity dip

Intangible costs

• Brand risk: Reputation exposure during transition
• Morale: Staff disruption, uncertainty, resistance
• Disruption: Business continuity impact during implementation

Classification rules

• Categorize every cost as one-time or recurring
• Exclude sunk costs explicitly — costs already incurred regardless of decision
• Assign each cost to specific years (Year 0 through Year N)
• Document source or basis for each estimate

Present cost table per alternative:

ID	Cost item	Category	Type	Year 0	Year 1	...	Year N	Confidence

Phase 5 — Benefit Identification

For each alternative, identify and categorize all benefits:

Tangible benefits

• Revenue increase: New revenue streams, market expansion, price optimization
• Cost savings: Reduced operational costs, efficiency gains, waste reduction
• Productivity gains: Time savings, throughput improvement, error reduction
• Error/risk reduction: Fewer defects, lower incident rates, compliance improvement

Intangible benefits

• Brand value: Market perception, competitive differentiation
• Satisfaction: Customer satisfaction, employee satisfaction
• Retention: Customer retention, employee retention
• Strategic positioning: Market readiness, capability building, optionality

Classification rules

• Categorize every benefit as direct or indirect
• Categorize every benefit as short-term (Years 0-2) or long-term (Years 3+)
• Assign each benefit to specific years (Year 0 through Year N)
• Document source or basis for each estimate

Present benefit table per alternative:

ID	Benefit item	Category	Type	Year 0	Year 1	...	Year N	Confidence	Monetization method

Phase 6 — Monetization

For intangible items (both costs and benefits), apply the most appropriate monetization technique:

Technique	When to use	Example
Productivity-based	Time savings quantifiable	Hours saved x labor rate
Avoided cost	Expense prevented	Insurance claim reduction, penalty avoidance
Proxy metrics	Indirect chain to financial value	Satisfaction -> retention -> CLV delta
Market-based	Comparable pricing exists	Benchmark against market rates for equivalent
Expert judgment	No direct data available	Estimate with confidence range (use sparingly)

Monetization rules

• Document the technique used for every intangible item
• Assign a confidence level to each: High (strong data), Medium (reasonable estimate), Low (expert judgment/assumption)
• For Low confidence items, provide a range (min-max) rather than a point estimate
• Never present monetized intangibles as precise figures — always show the basis

Phase 7 — Financial Calculations

For each alternative, calculate:

Year-by-year cash flow table

Year	Total costs	Total benefits	Net cash flow	Discount factor (1/(1+r)^t)	PV of net	Cumulative PV

Key metrics

• NPV (Net Present Value) = Sum of all discounted net cash flows
  • NPV > 0: project adds value
  • NPV < 0: project destroys value
• BCR (Benefit-Cost Ratio) = PV of total benefits / PV of total costs
  • BCR > 1: benefits exceed costs
• IRR (Internal Rate of Return) = Discount rate where NPV = 0
  • Calculate iteratively; if no solution exists, report "No IRR (cash flows do not cross zero)"
• Payback Period = Year when cumulative net cash flow turns positive
  • If never positive within the time horizon, report "Does not pay back within [N] years"
• Break-even point = When cumulative benefits equal cumulative costs (undiscounted)

Phase 8 — Sensitivity Analysis

Key variable identification

Identify 3-5 variables with the highest impact on NPV. Common candidates:

• Discount rate
• Implementation cost
• Revenue/benefit growth rate
• Labor cost rate
• Adoption/utilization rate

One-way sensitivity

For each key variable, vary by +/-20% and +/-40% from the base case:

Variable	Base value	-40%	-20%	+20%	+40%	NPV impact range

Scenario analysis

Define three scenarios with explicit assumptions:

Scenario	Key assumptions	NPV	BCR	Payback
Best case	[optimistic assumptions]
Base case	[most likely assumptions]
Worst case	[pessimistic assumptions]

Switching values

For each key variable, determine the value at which NPV becomes negative (or positive for cost variables):

Variable	Base value	Switching value	Meaning

Tornado diagram data

Rank variables by absolute NPV impact (most impactful at top) for diagram generation.

Phase 9 — Risk Assessment

Identify project-specific risks and link to sensitivity findings:

Risk	Probability	Impact	Related variable	NPV exposure	Mitigation

Risk rules

• Link each risk to a sensitivity variable where applicable
• Quantify NPV exposure where possible (probability x impact)
• Provide specific, actionable mitigation strategies
• Flag risks that could push NPV below zero

Phase 10 — Alternative Comparison

Side-by-side comparison table

Metric	Do Nothing	Alternative 1	Alternative 2	...
Total PV of costs
Total PV of benefits
NPV
BCR
IRR
Payback Period
Break-even
Key risks
Confidence level

Ranking

Rank alternatives by:

1. NPV (primary)
2. BCR (secondary)
3. Risk profile (tertiary)

Recommendation

State the recommended alternative with justification covering:

• Financial merit (NPV, BCR)
• Risk profile
• Strategic alignment
• Sensitivity robustness (does the recommendation hold across scenarios?)

Phase 11 — Diagrams

Generate 4 Mermaid diagrams:

Diagram 1: Cumulative Cash Flow Chart (xychart-beta)

Year-by-year cumulative net cash flow showing payback point, one line per alternative.

File naming: cumulative-cash-flow.mmd / .png

Diagram 2: Cost-Benefit Breakdown (xychart-beta)

Stacked bars showing cost categories vs benefit categories per alternative.

File naming: cost-benefit-breakdown.mmd / .png

Diagram 3: Tornado Diagram (xychart-beta)

Horizontal bars showing NPV impact per variable, most impactful at top.

File naming: tornado-diagram.mmd / .png

Diagram 4: Scenario Comparison (xychart-beta)

Grouped bars showing NPV for best/worst/base per alternative.

File naming: scenario-comparison.mmd / .png

Render diagrams per the diagram-rendering mixin.

Phase 12 — Report Assembly and Approval

Assemble the complete report:

# Cost-Benefit Analysis: [Project/Initiative]

**Date**: [date]
**Project**: [name]
**Alternatives evaluated**: [count]
**Time horizon**: [N years]
**Discount rate**: [X%]
**Recommended alternative**: [name] (NPV: [value])

## Executive Summary
[Key findings, recommended alternative, critical assumptions, primary risks]

## Methodology
[Discount rate justification, time horizon rationale, monetization approach]

## Alternatives
[Description of each alternative including "do nothing"]

## Cost Analysis
### [Alternative Name]
[Table: ID, Cost item, Category, Type, Year 0-N values, PV, Confidence]
[Subtotals by category, grand total]

## Benefit Analysis
### [Alternative Name]
[Table: ID, Benefit item, Category, Type, Year 0-N values, PV, Confidence, Monetization method]
[Subtotals by category, grand total]

## Financial Summary
### Year-by-Year Cash Flow
[Table per alternative: Year, Costs, Benefits, Net, Discount factor, PV, Cumulative]

### Key Metrics
| Metric | Alternative 1 | Alternative 2 | ... |
|---|---|---|---|
| NPV | | | |
| BCR | | | |
| IRR | | | |
| Payback Period | | | |
| Break-even | | | |

## Cumulative Cash Flow Chart
[Diagram 1]

## Cost-Benefit Breakdown
[Diagram 2]

## Sensitivity Analysis
### Key Variables
[Table: variable, base value, -40%, -20%, +20%, +40%, NPV impact]
### Tornado Diagram
[Diagram 3]
### Switching Values
[Table: variable, switching value, meaning]
### Scenarios
[Table: scenario, assumptions, NPV, BCR, payback]
### Scenario Comparison
[Diagram 4]

## Risk Assessment
[Table: risk, probability, impact, related variable, mitigation]

## Alternative Comparison & Recommendation
[Side-by-side table, ranking, recommended alternative with justification]

## Sources
[Numbered list of web sources — per autonomous-research mixin]

## Assumptions & Limitations
[Explicit list — per autonomous-research mixin]

Present for user approval. Save only after explicit confirmation.

Generation rules

Per the autonomous-research mixin, plus:

• May invent: Cost estimates based on industry benchmarks, benefit projections based on typical patterns
• Must be grounded: NPV/BCR/IRR/payback formulas, discount rate methodology, monetization technique definitions
• Assumptions allowed: Cost ranges based on industry data, benefit magnitudes based on comparable projects
• Must never fabricate: Specific financial figures without research basis, actual company financial data, guaranteed returns
• Calculations: Must be mathematically correct — NPV/BCR/IRR/payback must follow standard financial formulas
• Language: Respond and generate in the user's language unless specified otherwise

Failure behavior

Situation	Behavior
No project context	Enter interview mode (SS7) — "What project or initiative should I evaluate?"
Context too vague	Enter interview mode (SS7) — ask targeted questions
Cannot estimate key costs	Report gap, use ranges with low confidence
Discount rate unknown	Research industry standard, propose with justification
Single alternative only	Compare against "do nothing" baseline
Financial data unavailable	Use research-based estimates with [Assumption] labels and confidence levels
Intangible items unquantifiable	Use expert judgment with Low confidence and explicit range
IRR has no solution	Report "No IRR — cash flows do not cross zero"
Payback exceeds horizon	Report "Does not pay back within [N] years"
mmdc / web search failures	Per diagram-rendering and autonomous-research mixins
Out-of-scope request	"This skill performs cost-benefit analysis. [Request] is outside scope."

Self-check

Before presenting output, verify:

[] All costs categorized (direct/indirect/intangible, one-time/recurring)
[] All benefits categorized (tangible/intangible, direct/indirect)
[] Sunk costs excluded
[] Intangible items monetized with documented technique and confidence
[] Year-by-year cash flow table complete
[] NPV, BCR, IRR, Payback Period calculated
[] Discount rate justified
[] Sensitivity analysis on 3-5 key variables
[] Three scenarios defined (best/worst/base)
[] Risks identified with mitigations
[] Alternatives compared side-by-side
[] Clear recommendation with justification
[] All 4 Mermaid diagrams render valid syntax (per diagram-rendering mixin)
[] Sources listed (per autonomous-research mixin)
[] Assumptions labeled with confidence levels (per autonomous-research mixin)