The Benefit-Cost Ratio (BCR) is a financial appraisal technique that is used to evaluate the financial viability of an investment or project. It is calculated by dividing the present value of the project’s benefits by the present value of the project’s costs. The BCR helps decision-makers to understand the cost-effectiveness of an investment or project by comparing the monetary benefits it will generate to the costs of implementing it.
The formula for calculating the BCR is as follows:
BCR = PV of Benefits / PV of Costs
where PV is the present value of the cash flows.
In the BCR formula, the numerator represents the present value of the benefits generated by the project, which could include revenues, savings, or other positive impacts. The denominator represents the present value of the costs of implementing the project, which could include initial investment costs, ongoing operating costs, and other negative impacts.
A BCR of greater than 1 indicates that the benefits of the project outweigh the costs, and the project is considered financially viable. A BCR of less than 1 indicates that the costs of the project outweigh the benefits, and the project is considered financially unviable. A BCR of exactly 1 means that the benefits and costs of the project are equal.
The BCR is a useful tool for evaluating the financial viability of projects, as it provides decision-makers with a simple and clear metric to compare the expected benefits and costs of a project. However, it is important to note that the BCR does not take into account non-monetary factors, such as environmental or social impacts, which may also be important considerations in project decision-making. Therefore, it is important to use the BCR in combination with other evaluation techniques to make informed investment decisions.
BCR indicate benefit per rupee of cost, it can be calculated using following formula
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