What is a cost-benefit analysis and how is it used in evaluating capital projects?

• A. A method to measure aviation safety compliance.
• B. A tool to forecast weather impacts on operations.
• C. A method to rank airports by size.
• D. Compares costs and benefits over time; calculates net present value or return on investment to support decision making.

Answer: (D)

Cost-benefit analysis is a decision-making method that weighs the costs and benefits of a potential capital project over time, using the time value of money. In capital budgeting, you forecast all expected costs and all expected benefits, discount them to their present value, and then compare total benefits to total costs. The analysis yields metrics like net present value or return on investment, which help determine whether the project adds economic value. If the net present value is positive, the project is expected to be worthwhile; if negative, it is not. This framework provides a clear, quantitative basis for choosing among competing investments by focusing on overall financial impact. The other options describe activities such as safety compliance, weather impact forecasting, or ranking by size, which do not assess the economic viability of capital investments.