EQUIVALENCE OF TIME AND VALUE

What Is the Benefit-Cost Ratio (BRC)?

• The benefit-cost ratio (BCR) is a ratio used in a cost-benefit

analysis to summarize the overall relationship between the
relative costs and benefits of a proposed project. BCR can be
expressed in monetary or qualitative terms.
• Formula
 Benefit-Cost Ratio Formula = Present value of Benefit Expected
from the Project / Present Value of the Cost of the Project

• If a project has a BCR greater than 1.0, the project is expected to

deliver a positive net present value to a firm and its investors.
• If a project's BCR is less than 1.0, the project's costs outweigh
the benefits, and it should not be considered.
 Totals
are
equal,
but
NPVs
are
not

23
NPV or Discounted Cash Flow Based Selection

Initial cost = $700,000; 4-year annual cash flow = $200,000;

required rate of return = 15%
NPV = -700,000 + 200,000/(1.15)1
+ 200,000/(1.15)2 + 200,000/(1.15)3
+ 200,000/(1.15)4
NPV = -700,000 + 173,913 + 151,229 + 131,503
+ 114,351
NPV = $-129,004

Should they do this project?