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  • Question

    Is it acceptable in a BCA, CBA or EA construct to provide marginal analysis without presenting the total cost of each alternative? It seems that it should be, as certain costs (e.g., sunk costs) are typically excluded from the total costs anyway. Could one exclude future wash costs from the analysis? The DoD Automated Information System Economic Analysis Guide (Wilson, 1995) does not mention wash costs. I believe one can provide recommendation to go with an alternatives or the other based on marginal costs and marginal benefits. One can also compute and present net present values. ROI can be computed also, although it will be a negative number in this case.


    Answer

    The Department of the Army Economic Analysis Manual describes “marginal analysis” as follows, “Marginal analysis, also referred to as incremental analysis, can be considered a specialized extension of benefit cost analysis. It examines the differences between alternatives and provides an indication of whether the differential costs of an alternative are justified by its differential benefits. This technique is different from most other techniques in that total costs and benefits are not evaluated, but rather various degrees (or increments) of investments and their resulting benefits. Since marginal analysis does not provide adequate awareness of the total costs and benefits of an alternative, it should not be used as the sole evaluation criteria.”
     
    The emphasis here appears to be that while marginal analysis is one means to compare alternatives, it is not to be used in lieu of providing the total [future] costs of each alternative.
     
    A similar sentiment can be found in the Air Force Manual 65-506 on Economic Analysis, “The DoD position is that all costs of each alternative should be identified. In practice it has been found that failing to identify all costs can easily lead to decisions being made on what in reality is incomplete and partial information.”

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