Benefit Cost Ratio (BCR)
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| + | The Benefit Cost Ratio is a profitability indicator, and it is the ratio of the present value of the benefit of the project to the present value of the cost. It is usually used to summarize the results of the cost benefit analysis (CBA) during the financial appraisal of a proposed program, project or portfolio. | ||
== Time value of money == | == Time value of money == | ||
Revision as of 20:01, 17 February 2023
Contents |
Abstract
This article discusses the application of the Benefit Cost Ratio (BCR) method in the Cost Benefit Analysis. The Benefit Cost Ratio is a profitability indicator, and it is the ratio of the present value of the benefit of the project to the present value of the cost. It is usually used to summarize the results of the cost benefit analysis (CBA) during the financial appraisal of a proposed program, project or portfolio. [1] BCR indicates if the project is feasible or not, meaning the higher the BCR, the more attractive the risk-return profile of the project/asset. If the BCR value of a project is less than 1, the project's costs outweigh the benefits, and it should not be considered viable. Calculating the BCR of an asset or project is comparatively simple. In addition, the ratio considers the discount rate, hence the time value of the money.[2]. Despite the fact that BCR is a tool to show the attractiveness of a project or an asset, cannot simply be the only determinant of a project's feasibility.
Initially, this article discusses the origin of the Cost Benefit Analysis and BCR. Then, it focuses on the formula for the calculation of the Benefit Cost Ratio and how it considers the time value of the money. Next, there is a comparison between BCR and other CBA methods. After that, the article introduces other formulas and applications of the BCR. Finally, it discusses the advantages and the limitations of the Benefit Cost Ratio.
Cost Benefit Analysis
Cost-benefit analysis (CBA) is a method of economic assessment that seeks to quantify the positive and negative impacts of a proposed decision or project. The technique has been used for centuries, with the earliest known examples dating back to the 1700s. However, the use of CBA were mandatory only after regulations were established by the US government in the 1930s CBA is often used to determine whether or not a proposed decision or project is worth investing in. It is also used to compare different options or to determine which option will provide the greatest benefit to its stakeholders.
What is BCR?
The Benefit Cost Ratio is a profitability indicator, and it is the ratio of the present value of the benefit of the project to the present value of the cost. It is usually used to summarize the results of the cost benefit analysis (CBA) during the financial appraisal of a proposed program, project or portfolio.
Time value of money
Discount Rate
How to Calculate BCR?
Examples
Comparison Between BCR and NPV
Advantages of BCR
Limitations of BCR
References
- ↑ Shively G., An Overview of Benefit-Cost Analysis., (Gerald Shively, Purdue University, 2012),
- ↑ CFI Team., Benefit-Cost Ratio (BCR), https://corporatefinanceinstitute.com/resources/accounting/benefit-cost-ratio-bcr
