The Benefit Cost Ratio is an indicator that helps you compare different investment alternatives based on the discounted value of all costs and benefits of the respective investment. It is typically used in a cost-benefit analysis and capital budgeting (source).
The BCR provides an indication of whether and to which extent the present value of the benefits of an investment exceed the its discounted cost. The formula takes a discount rate into account that can be set by the person or organization that conducts the analysis (read more in the section on input parameters.
Interpretation of Values
The value of the calculated benefit cost ratio falls in one of the following three value ranges:
|< 1||The present value of the cost and investment exceed the present value of the benefits. Incurring such investment is generally not recommended.|
|= 1||The discounted benefits are equal to the cost and investment amount. In other words, the investment will yield the discount rate yet not generate additional value.|
|> 1||The investment alternative may be worthwhile (subject to other considerations, of course) as the discounted benefits exceed its cost and initial investment.|
The Benefit Cost Ratio Calculator
Select the number of periods, define the discount rate and populate the projection of benefits and cost of a single investment option. If you intend to use this calculator to compare different investment alternatives, they will need to be processed one-by-one.
This section comprises of further details on the input data.
Discount Rate per Period
The discount rate can be a market interest rate, the weighted average cost of capital, or an expected profitability rate. Note that the rate will be constant for all periods.
The discount rate must refer to the same type of period as the forecast. For example, if you forecasted annual benefits and costs, the discount rate should be an annual rate. If you define a period as a quarter, you will need to provide a quarterly discount rate. To convert annual rates into quarterly or monthly interest rates, use this calculator (or the formulas explained in that article).
Initial Investment Amount
The initial investment is the amount that you are investing in period 0. Thus, it will not be subject to discounting.
Forecast of Costs and Benefits
Before you insert the figures of your cost and benefit forecast, select the number of periods. You can populate costs and benefits for up to 6 periods. A period can refer to a month, a quarter, a year or any other timeframe. Be aware though that your definition of period has to be consistent for all periods and should also be reflected in the discount rate (see explanations above).
All costs and benefits, as well as the investment amount, need to be populated in the same unit, typically US dollars, Euro or any other currency.
When determining the costs and benefits, make sure that you are referring to gross figures. A netting or offsetting within a forecast period may otherwise produce imperfect results.
We hope you have liked using our benefit cost ratio calculator! Feel free to use our other finance calculators which will help you determine other useful indicators of your investment alternatives.