1. What is the Benefit-Cost Ratio?

The Benefit-Cost Ratio (BCR) is a financial metric used to evaluate the economic viability of projects or investments. It compares the present value of benefits to the present value of costs, helping decision-makers assess whether the benefits outweigh the costs.

2. How Does the Calculator Work?

The calculator uses the BCR formula:

Where:

• \( PV_{Benefits} \) — Present value of all benefits ($)
• \( PV_{Costs} \) — Present value of all costs ($)

Explanation: A BCR greater than 1 indicates that the benefits exceed the costs, making the project economically favorable. A BCR less than 1 suggests the costs outweigh the benefits.

3. Importance of BCR Calculation

Details: BCR is crucial for project evaluation, investment analysis, and policy decision-making. It provides a clear quantitative measure to compare different projects and allocate resources efficiently.

4. Using the Calculator

Tips: Enter the present value of benefits and costs in dollars. Both values must be positive, with costs greater than zero for valid calculation.

5. Frequently Asked Questions (FAQ)

Q1: What does a BCR of 1.5 mean?
A: A BCR of 1.5 means that for every dollar invested, you get $1.50 in return, indicating a profitable investment.

Q2: How is present value calculated?
A: Present value is calculated by discounting future cash flows to their value in today's dollars using an appropriate discount rate.

Q3: What are the limitations of BCR?
A: BCR doesn't account for project scale, non-monetary factors, or risk variability. It should be used alongside other metrics like NPV and IRR.

Q4: Can BCR be negative?
A: No, BCR cannot be negative since both benefits and costs are expressed as positive values. A ratio below 1 indicates unfavorable economics.

Q5: How does BCR differ from ROI?
A: BCR compares total benefits to total costs, while ROI measures the percentage return on investment. Both are important but provide different perspectives.