Benefit-Cost Ratio (BCR)
The benefit-cost ratio (BCR) is a financial metric that compares the present value of benefits to the present value of costs, expressed as a ratio, to determine whether a project's benefits outweigh its costs.
Explanation
BCR provides a simple ratio to assess project viability. A BCR greater than 1.0 means benefits exceed costs—the project is worth pursuing. A BCR less than 1.0 means costs exceed benefits. A BCR of exactly 1.0 means benefits and costs are equal, providing no net gain.
To calculate BCR, divide the present value of all expected benefits by the present value of all expected costs. For example, if a project's benefits have a present value of $500,000 and its costs have a present value of $400,000, the BCR is 1.25. This means the project returns $1.25 for every $1.00 invested.
On the exam, BCR is one of the most commonly tested project selection metrics. When comparing multiple projects, select the one with the highest BCR (assuming all are above 1.0). BCR is particularly useful because it accounts for the time value of money when present values are used in the calculation.
Key Points
- •BCR greater than 1.0 indicates benefits exceed costs
- •Higher BCR is preferred when comparing projects
- •Calculated as Present Value of Benefits / Present Value of Costs
- •A BCR of less than 1.0 means the project should be rejected
Exam Tip
BCR > 1 means the project is viable. When comparing projects, choose the one with the highest BCR. This is one of the most commonly tested selection criteria.
Frequently Asked Questions
Related Topics
Net Present Value (NPV)
Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time, used to assess the profitability of a project or investment.
Return on Investment (ROI)
Return on investment (ROI) is a financial metric that measures the percentage gain or loss generated by an investment relative to its cost, calculated as (Net Profit / Cost of Investment) x 100.
Project Selection Methods
Project selection methods are the techniques organizations use to evaluate and choose which projects to pursue, including mathematical models (NPV, IRR, BCR) and comparative approaches (scoring models, peer review).
Internal Rate of Return (IRR)
The internal rate of return (IRR) is the discount rate at which the net present value of all cash flows from a project equals zero, representing the project's expected annualized rate of return.
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