Cost-benefit analysis (CBA) examines the costs and benefits of policies over a long-term period. The period in which benefits and costs are assessed is referred to as the time horizon or the time frame. CBAs should, in concept, measure both costs and benefits for as long as they persist, but in practice may estimate them for a shorter duration. This document describes how to choose an appropriate time horizon for a cost-benefit study.
Choosing the time horizon
The costs and benefits identified in a CBA typically arise over a number of years. The time horizon selected for a CBA therefore has a critical effect on its results—a narrow time frame may lower the net present value of a project by overlooking future benefits, while a lengthy time horizon may overestimate future benefits. You should select a time horizon that encompasses all the important benefits and costs likely to result from the policy, while also taking into account how far into the future you can reasonably predict the policy’s effects. For many CBAs, the time frame is based on the period that outcome evaluations cover when studying a policy’s impacts (usually referred to as a “follow-up period”).
Consider this scenario: A jail administrator wants to conduct a CBA to decide whether to institute a six-month training program for corrections officers. An outcome evaluation of the program in a nearby county showed that jail safety improved during a two-year follow-up period. The CBA’s time horizon should therefore be at least 2.5 years, to include six months of training and two years of benefits. If the CBA had a shorter time horizon—for instance, only one year—the analysis would capture the budgetary costs incurred to administer the training but would likely undercount the program’s benefits and skew the results. In this example, a longer time horizon, if feasible, might net more useful information. For instance, improved safety outcomes beyond the two-year evaluation would result in even greater benefits.
The follow-up period studied in an outcome evaluation may be an arbitrary length of time based on practical constraints (for instance, the amount of funding for the evaluation) rather than on a sense of how long a policy or program’s effects will last. If you have evidence that benefits will persist beyond an evaluation’s follow-up period, you could extend the time horizon based on that assumption. (For more on testing assumptions and addressing uncertainty in cost-benefit studies, see the Sensitivity Analysis tool.) Note, however, that many factors can contribute to a decrease or decay in a program or policy’s impact in the long run. For example, a CBA may demonstrate that the installation of security cameras in a parking lot has a net benefit because it prevents thefts for several years. But over time, thieves may figure out where the equipment’s blind spots are, reducing the cameras’ benefits and decreasing their overall effectiveness.
Keep in mind
The time horizon should be clearly documented to indicate how long it will take for the policy to generate the anticipated return. It is also important to discount values to a common year when estimating costs and benefits over multiple years. Discounting is a technique that translates future costs and benefits into present-day values. The effect of discounting becomes more significant over longer time horizons (for more information, refer to the concept of the time value of money).