Although the relative comparison of B/C ratios shows that Project 1 is more efficient than Project 3, the absolute measure of net benefit is much higher for Project 3. Based on B/C ratio in this example, Project 1 (having a B/C ratio of 4.0) would be ranked above Project 2 ( B/C ratio of 1.5) and Project 3 ( B/C ratio of 2.0). Table 2-1 presents a hypothetical comparison of three projects showing the project monetized benefits, costs, B/C ratio, and net benefit. Net benefit can be useful in ranking projects with similar B/C ratios. This output provides an absolute measure of benefits (total dollars), rather than the relative measures provided by B/C ratio. Net Benefit is determined by summing all benefits and subtracting the sum of all costs of a project. In comparing the various projects, those projects with the highest B/C ratio would be ranked as the most efficient.Ī second common output measure from B/C analysis is a project Net Benefit. Various projects may be prioritized (in terms of economic efficiency), assessing each project individually and calculating the B/C ratio for each project. A negative value indicates that the project is expected to generate greater disbenefits than actual benefits meaning that on a net basis, the project would make conditions worse rather than better.)īenefit/cost ratios can be used to compare the relative value of different projects. ( B/C ratios are nearly always positive, ranging from zero to 15 or higher for some TSM&O strategies. Projects with a B/C ratio of exactly one – benefits are determined to be exactly the same as costs – are said to be At Cost Efficiency. Projects determined to have a B/C ratio less than one are Inefficient investments since the costs of the project are greater than incremental benefits created by the project. Projects determined to have B/C ratios greater than one are said to be Efficient investments in that, each dollar invested in the project returns more than $1.00 in benefits. For example, a project producing $150,000 in benefits and costing $100,000 would result in a B/C ratio of 1.5:1 or 1.5 ($150,000 benefits/$100,000 costs).
This output may either be expressed as a ratio (2:1) or a resultant value (2). The result is called the Benefit/Cost Ratio and is often the primary output of the analysis process. As the name implies, benefit/cost analysis determines the value of a project by dividing the incremental monetized benefits related to a project by the incremental costs of that project. Benefit/costs analysis is one type of economic valuation – an analysis that assesses the relative value of a project in monetized estimates. The analysis is identical despite the naming differences. ( National Academies Transportation Research Board (TRB) Economics Committee.)īenefit/Cost analysis is also commonly referred to as Cost-Benefit Analysis, CBA, Benefit/Cost Analysis, and BCA.
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