Benefit-cost ratio

Benefit-cost ratio

A benefit-cost ratio (BCR) is an indicator, used in the formal discipline of cost-benefit analysis, that attempts to summarize the overall value for money of a project or proposal. A BCR is the ratio of the benefits of a project or proposal, expressed in monetary terms, relative to its costs, also expressed in monetary terms. All benefits and costs should be expressed in discounted present values.

Rationale

In the absence of funding constraints, the best value for money projects are those with the highest net present value. Where there is a budget constraint, the ratio of NPV to the expenditure falling within the constraint should be used. In practice, the ratio of PV of future net benefits to expenditure is expressed as a BCR. (NPV-to-investment is net BCR.) BCRs have been used most extensively in the field of transport cost-benefit appraisals. The NPV should be evaluated over the service life of the project.

Problems

Long-term BCRs, such as those involved in climate change, are very sensitive to the discount rate used in the calculation of net present value, and there is often no consensus on the appropriate rate to use.

The handling of non-monetary impacts also present problems. They are usually incorporated by estimating them in monetary terms, using measures such as WTP (willingness to pay), though these are often difficult to assess. Alternative approaches include the UK's New Approach to Appraisal framework.

A further complication with BCRs concerns the precise definitions of benefits and costs. These can vary depending on the funding agency.

See also


Wikimedia Foundation. 2010.

Игры ⚽ Нужен реферат?

Look at other dictionaries:

  • Benefit Cost Ratio - BCR — A ratio attempting to identify the relationship between the cost and benefits of a proposed project. This ratio is used to measure both quantitative and qualitative factors since sometimes benefits and costs cannot be measured exclusively in… …   Investment dictionary

  • benefit–cost ratio — The evaluation of a proposed activity by determining the value of the anticipated benefits likely to accrue compared to the costs that will be incurred. If the benefits exceed the costs the activity is financially attractive, although there may… …   Accounting dictionary

  • Cost–benefit analysis — (CBA), sometimes called benefit–cost analysis (BCA), is a systematic process for calculating and comparing benefits and costs of a project for two purposes: (1) to determine if it is a sound investment (justification/feasibility), (2) to see how… …   Wikipedia

  • Cost-benefit analysis — is a term that refers both to:* a formal discipline used to help appraise, or assess, the case for a project or proposal, which itself is a process known as project appraisal; and * an informal approach to making decisions of any kind. Under both …   Wikipedia

  • cost–benefit analysis — ▪ economics       in governmental planning and budgeting, the attempt to measure the social benefits of a proposed project in monetary terms and compare them with its costs. The procedure, which is equivalent to the business practice of cost… …   Universalium

  • benefit — Advantage; profit; fruit; privilege; gain; interest. The receiving as the exchange for promise some performance or forbearance which promisor was not previously entitled to receive. Graphic Arts Finishers, Inc. v. Boston Redevelopment Authority,… …   Black's law dictionary

  • benefit — Advantage; profit; fruit; privilege; gain; interest. The receiving as the exchange for promise some performance or forbearance which promisor was not previously entitled to receive. Graphic Arts Finishers, Inc. v. Boston Redevelopment Authority,… …   Black's law dictionary

  • Cost-plus-incentive fee — A CPIF Cost Plus Incentive Fee contract is a cost reimbursement contract that provides for an initially negotiated fee to be adjusted later by a formula based on the relationship of total allowable costs to total target costs.[1] Like a cost plus …   Wikipedia

  • Cost–utility analysis — (CUA) is a form of financial analysis used to guide procurement decisions. The most common and well known application of this analysis is in pharmacoeconomics, especially health technology assessment (HTA). Contents 1 CUA in health economics 1.1… …   Wikipedia

  • Cost-utility analysis — (CUA) is a form of economic analysis used to guide procurement decisions. The most common and well known application of this analysis is in pharmacoeconomics, especially health technology assessment (HTA).CUA in health economicsIn health… …   Wikipedia

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”