how the benefit cost ratio bcr works
benefit cost ratios bcrs are most often used in capital budgeting to analyze the overall value for money of undertaking a new project however the cost benefit analyses for large projects can be hard to get right because there are so many assumptions and uncertainties that are hard to quantify this is why there is usually a wide range of potential bcr outcomes the bcr also does not provide any sense of how much economic value will be created so the bcr is usually used to get a rough idea about the viability of a project and how much the internal rate of return irr exceeds the discount rate which is the company s weighted average cost of capital wacc the opportunity cost of that capital the bcr is calculated by dividing the proposed total cash benefit of a project by the proposed total cash cost of the project prior to dividing the numbers the net present value of the respective cash flows over the proposed lifetime of the project taking into account the terminal values including salvage remediation costs is calculated 