The formula to calculate Cost-Benefit Ratio is:
\[ \text{Cost-Benefit Ratio} = \frac{\text{Sum of Present Value of Expected Benefits}}{\text{Sum of the Present Value of Associated Costs}} \]
Cost-Benefit Analysis (CBA) is a decision-making tool that evaluates the potential costs and benefits of a project or action to determine its overall value. CBA involves comparing the total costs associated with a particular course of action to the total benefits it is expected to generate. By quantifying and comparing the costs and benefits, CBA enables individuals and organizations to make informed choices.
CBA is crucial as it provides a systematic approach to assess the feasibility and desirability of a proposed project or policy. It helps in determining whether the benefits of undertaking an action outweigh the costs associated with it. This analysis allows decision-makers to prioritize projects based on their impact and efficiency, ensuring the allocation of limited resources to the most beneficial endeavors.
The key advantage of CBA is its ability to provide a standardized framework for decision-making. It allows decision-makers to compare different options and objectively assess their value. CBA also enables transparency and accountability in decision-making by providing a clear rationale for the chosen course of action.
Let's consider an example:
Using the formula to calculate Cost-Benefit Ratio:
\[ \text{Cost-Benefit Ratio} = \frac{500,000}{300,000} \approx 1.67 \]
This means that for every dollar spent, the project is expected to return $1.67 in benefits, making it a potentially worthwhile investment.