Benefit-cost ratio
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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.
[edit] 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 NPV to expenditure is expressed as a 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.
[edit] Problems
A major shortcoming of BCRs is that, by definition, they ignore non-monetised impacts. Attempts have been made to overcome this limitation by combining BCRs with information about those impacts that cannot be expressed in monetary terms, such as 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.
