Benefit Cost Ratio (BCR)
Abstract
This article discusses the Benefit Cost Ratio (BCR) method. 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 a 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.
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
