A benefit cost ratio is a ratio of benefits to costs of a project and is the core of a cost and benefit analysis. In simple terms, it assesses whether the benefits associated with a project outweigh the relative costs. For the purpose of investment appraisal, the cost and benefit analysis is carried out using techniques like IRR and NPV. For simple and shorter projects where the costs and associated benefits are easily determinable.
The ratio is calculated as follows.
Benefit cost ratio = Benefits / cost
Ideally, the ratio should be above 1.0. This would suggest that the benefits are outweighing the costs. If the ratio is less than 1.0, the costs are more than the benefits and hence the project should not be accepted.
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