Project Selection – Benefit-Cost Ratio

benefit cost ratio

Definition

Benefit-Cost ratio is the ratio of the benefits of a project compared to the costs calculated in terms of Present Value (PV).

  • BCR > 1 – the project is profitable, and the higher the BCR the better
  • BCR = 1 – the project will break even
  • BCR < 1 – the project will cause the organization to lose money and is generally considered as not a good investment

Sample Question

The total cost of a project being undertaken is $1,000,000 (NPV). It is expected that an increase in revenue of $2,000,000 (NPV) would be realized once the project is complete. What is the Benefit-Cost Ratio (BCR) of the project?

A. 0.5
B. 20
C. 2
D. Not enough information to calculation

Solution: C

Benefits = $2,000,000 and Costs = $1,000,000. Since BCR = Benefits / Costs = $2,000,000 / $1,000,000 = 2

Ideally speaking, you will not be required to calculate BCR in the PMP exam. Expect the value of BCR to be given in the question where you can select the highest as being most favorable.

Larger the better

The larger the Benefit-Cost Ratio (BCR), the more favorable the project financially is to the organization.

Check more articles on Cost Management

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