ABSTRACT
This chapter presents several simple yet useful tools of cost analysis that have received considerable attention in cost studies. They are: break-even analysis, differential cost analysis, payback period, buy or lease, benefit–cost analysis, and life-cycle costing. Of these, break-even analysis has been extensively used in business and benefit–cost analysis in government. Its primary purpose is to bring together the cost, revenue, and output of an activity to determine the best course of action for a government. Financial necessities often require that a government must find ways to increase its revenue to meet a specified goal or target. Buying or leasing is a special case of differential cost analysis in which costs are compared not between an existing condition and an alternative, but between two alternatives – buy or lease. Since leasing involves a commitment of resources that extends over several years into the future, it is necessary to introduce the notion of the time value of money.
