Benefit-Cost Ratio (BRC)

What is a Benefit-Cost Ratio (BRC)?

Definition

The benefit-cost ratio is an indicator used in a cost-benefit analysis to give an overview of a project or proposal showing the relationship between the relative costs and benefits of the project. The BCR expresses the ratios in monetary or qualitative terms the benefits of the project relative to its costs.  Both the costs and benefits are expressed in discounted present values.

Other Information

BCRs are financial tools mostly used in capital budgeting to analyze or evaluate the overall value for the total amount of money required to undertake a project. The cost-benefits analyses for larger projects may tend to be daunting due to the numerous doubts and assumptions involved in the process.

A BCR accounts for the monetary gain gotten by performing a project against the actual amount it costs to execute the project. For example, if a project has a BCR higher than 1.0, it would be expected of the project to produce a positive net present value to a company. In a case where the project’s BCR is below 1.0, it should be regarded as a bad move as the project’s costs will offset the benefits.

Since the BCR doesn’t provide an actual sense of the amount of economic value that will be created, it is used to give a general idea on the feasibility of the project and the extent to which the internal rate of return (IRR) supersedes the discount rate; that is, the company’s weighted-average cost of capital (WACC).