Cost-Benefit Analysis of Computer Purchase for Small Business
This paper applies cost-benefit analysis to evaluate a computer purchase decision for a small independent business. The analysis identifies all relevant costs, including hardware, software, support, and installation ($1,452.28), and quantifies benefits from e-commerce expansion, increased traditional sales, and labor time savings across a three-year period ($3,443.58). The paper then applies net present value methodology with a 5% discount rate to account for the time value of money, yielding a net present value of $1,809.84. The conclusion supports the investment as financially justified, provided sales projections prove accurate.
- Introduction: Cost-benefit approach for evaluating business investments
- Identifying and Calculating Costs: Hardware, software, and support costs totaling $1,452.28
- Quantifying Benefits Over Time: E-commerce, sales growth, and labor savings over three years
- Simple Cost-Benefit Assessment: Net benefit of $1,991.30 before accounting for time value
- Net Present Value Analysis: Adjusted NPV of $1,809.84 accounting for inflation and discount rate
- Conclusion: Investment justified if sales projections materialize
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What makes this paper effective
- Provides a concrete, real-world case study with specific dollar figures and itemized costs, making the analysis tangible and easy to follow.
- Progresses logically from simple cost-benefit comparison to the more sophisticated net present value method, showing how financial analysis can be layered and improved.
- Acknowledges limitations and assumptions (e.g., the 5% discount rate is speculative) rather than presenting results as certainties, demonstrating analytical maturity.
- Uses clear tables to organize complex financial data, enhancing readability and allowing readers to verify calculations.
Key academic technique demonstrated
The paper demonstrates financial appraisal through progressive complexity. It begins with straightforward subtraction (benefits minus costs), then introduces the net present value framework—a standard investment evaluation tool in finance and business. By showing both methods and explaining why NPV is superior (accounts for time value of money), the paper illustrates how practitioners move beyond naive approaches to more rigorous decision-making. The explicit discussion of discount rate selection and sensitivity (noting that results are "speculative") shows critical thinking about model assumptions.
Structure breakdown
The paper follows a formal financial analysis structure: (1) problem statement and context, (2) itemized cost inventory with total, (3) benefit estimation across three years with multiple benefit streams, (4) initial net calculation, (5) refined NPV calculation with discounting, and (6) conclusion. This mirrors standard business case analysis and investment recommendation formats. Each section builds on prior data, and tables serve as both evidence and reference points for subsequent calculations.
Introduction
In today's commercial environment, it is necessary that small as well as large businesses remain competitive. For every investment there will be an opportunity cost, so it is essential that potential investments are assessed to help maximize value creation. One approach frequently used is the cost-benefit approach, which measures costs and benefits based on the underlying principle that an investment or project should only proceed if the benefits are greater than the costs incurred. If a small business is considering investing in a computer, a cost-benefit analysis may help assess whether the investment is likely to be beneficial.
This analysis begins with the assessment of costs to be incurred and potential benefits. In this case, it is assumed that a business such as an independent shop is considering purchasing a computer to increase efficiency for counting and record-keeping, as well as to facilitate an expansion strategy into e-commerce, allowing the business to sell online.
Identifying and Calculating Costs
The computer selected as suitable for the small business is a Dell OptiPlex mini tower. It is essential that all requirements are considered, not just the cost of the core computer. All items assessed as required are taken from the Dell website. The computer is a starting point, but it is also necessary to look at the additional hardware, software, and support needed. For example, a computer system requires a monitor, speakers, and a printer. As the business will rely on a computer, it is also advisable to ensure there is sufficient technical support with a service agreement. The costs include an extended warranty for both the computer and printer, and accident insurance so that replacements can be made if needed. The software included is Microsoft Office, as well as a three-year Dell data protection and encryption license.
Table 1: Initial Costs
| OptiPlex 3020 Tower | $529.00 |
| 20 inch monitor | $119.99 |
| Speaker | $20.30 |
| 3 year technical support/warranty | $91.30 |
| Accident insurance | $34.30 |
| Printer with 3 year warranty | $319.99 |
| Microsoft Office | $195.30 |
| Dell data protection and encryption (3 year license) | $72.80 |
| Installation | $69.30 |
| Total | $1,452.28 |
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