Cost-Benefit Ratio Calculator help in analyzing the cost-benefit relationship of an investment or a project. It is also known by the name of Profitability Index. It is one of the most commonly used capital budgeting techniques. The cost-benefit ratio makes a comparison between the discounted values of the total cost of the project and its estimated future cash flows/benefit derived. Costs and benefits are discounted to their present values. It helps in comparing different budgets and selecting the one with higher returns. That is, it simply determines which investment proposal is beneficial for the company. Since everyone is aware of the importance of the time value of money, this concept becomes more advantageous as it considers the variation in the cash flows spread over the years.
Formula to calculate the cost-benefit ratio is as follows:
Discounted Value of Benefits / Discounted Value of Costs
Cost Benefit Ratio Calculator
How to Calculate using Calculator?
The user has to simply insert the following data into the calculator:
Discounted Value of Benefits – The management of the company estimates the benefits that can be derived during the life of the project. These benefits in terms of cash flows over the years are discounted at to bring them all at par with their present values. This will take care of the difference in the timing of inflows.
Discounted Value of Cost – Costs are generally incurred at the zero period, but there could be instances where extra costs are required to incur in order to continue the project. These costs may include an additional working capital requirement or additional equipment, etc. The management discount these costs on their present value.