KEVOS® MAKEOS · Money
Benefit–Cost Ratio
Do the discounted benefits of this project exceed its discounted costs, and by how much?
Present value of annual benefits and costs, initial investment and salvage at a discount rate, the benefit–cost ratio and the net benefit.
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How this tool works
Inputs, units and where to find them
| Input | Unit | Typical source |
|---|---|---|
| Initial investment | AUD | Up-front cost. |
| Annual benefits | AUD/yr | Yearly benefits (savings, extra margin). |
| Annual operating costs | AUD/yr | Yearly costs of running the project. |
| Salvage value | AUD | Value recovered at the end. |
| Life | years | Years of benefits. |
| Discount rate | % | Your organisation’s discount rate. |
Method and formulas
- PV benefits = B × P/A(i, n); PV costs = P + C × P/A(i, n) − S × P/F(i, n).
- Conventional B/C = PV benefits ÷ PV costs; modified B/C = (PV benefits − PV operating costs) ÷ (P − PV salvage).
- Accept when B/C > 1.
- Example: the default project has B/C = 1.1873.
Limitations
- Level annual amounts; uneven flows need the IRR tool’s year-by-year inputs.
- Example values are illustrations. Replace them with values for your actual task.
Typical uses
- Rank improvement projects
- Present a project case to management
- Compare with NPV and IRR results
Who it is for
- Engineering managers
- Cost estimators
- Finance and business analysts
What you get
- Present value of benefits and costs
- Benefit–cost ratio (conventional and modified)
- Net present benefit
Interpreting the result
- B/C and NPV agree on accept/reject; for ranking projects of different size, compare incremental B/C.
References
- Machinery’s Handbook, 29th edition (Industrial Press, 2012), printed pp. 140–144. Topic reference; no source tables or recommended settings are reproduced.
WORKOS tools are screening and decision-support utilities. Verify important financial, engineering, safety, legal or operational decisions using appropriate professional standards and your organisation’s approved data.
