Benefit-Cost Ratio
Candlefocus EditorTo calculate the BCR, the present value (PV) of the project’s costs and benefits is calculated. Present value is the value of a project's future cash flows today, discounted to account for inflation, risk and other factors. The BCR is then calculated by dividing the PV of the benefits by the PV of the costs.
If the benefits outweigh the costs, the result is a BCR greater than 1. 0, indicating a positive net present value to the project and investors. On the other hand, a BCR of less than 1. 0 indicates that the costs outweigh the benefits, and is thus a signal for the project to be avoided.
The BCR is a versatile tool and can be calculated for either the whole project or for a single financial year, making it possible to assess future risks and rewards. Furthermore, by including qualitative benefits such as environmental protection or job creation, the BCR can offer a more comprehensive view of the project’s benefits.
Analyzing the BCR of different projects allows informed decisions to be made on where best to allocate resources and capital. Although the BCR is an effective tool in project selection, it is important to note that it only looks at short-term gains. The wider impact of the project in terms of wider economic, environmental and social benefits should also be considered.