Reporting the Results of Cost-Benefit Analysis
Cost-benefit analysts typically use one of several metrics—or a combination of them—to report their findings. The benefit-cost ratio, return on investment, and net present value report the results of a cost-benefit analysis by comparing discounted costs with discounted benefits. This document briefly describes each metric, the information it conveys, and its advantages for reporting cost-benefit findings.
The Benefit-Cost Ratio (BCR) directly compares benefits and costs. To calculate the BCR, divide total discounted benefits by total discounted costs. For example, a program that costs $3 million and accrues $8 million in benefits has a BCR of 2.67 ($8 million divided by $3 million). A benefit-cost ratio of 2.67 means policymakers can expect $2.67 in benefits for every $1 in costs. A BCR greater than 1 means the benefits outweigh the costs and the investment should be considered. If the ratio is less than 1, the costs outweigh the benefits. If the BCR is equal to 1, the benefits equal the costs.
The Return on Investment (ROI) is similar to BCR, but compares the net benefit (total discounted benefits minus total discounted costs) to costs. To calculate the ROI for the previous example, first calculate the net benefits ($8 million minus $3 million equals $5 million). Then divide the net benefits by the total costs ($5 million divided by $3 million). The result—1.67—is the ROI, which is typically expressed as a percentage (167 percent). Thus, the investment (i.e., the cost) will generate a return (i.e., net benefit) that amounts to 167 percent of the cost of the investment. The ROI indicates how much of the investment policymakers can expect to receive as a benefit. If the ROI is positive, the benefits exceed the costs and the investment should be considered. A negative ROI means that the costs outweigh the benefits. An ROI of 0 means the benefits equal the costs.
The Net Present Value (NPV) reflects the net benefits of a project in dollar terms. To calculate NPV, subtract the total discounted costs from the total discounted benefits. The NPV for the previous example is $5 million ($8 million minus $3 million) A positive NPV means that benefits outweigh costs and the investment should be considered. A negative NPV means that the costs outweigh the benefits. An NPV of 0 means the benefits are equal to the costs.
Selecting a metric for reporting results
All three metrics can be used to report results for a cost-benefit analysis. Each one emphasizes a different aspect of the relationship between benefits and costs.
- The BCR is commonly used to demonstrate an investment’s “bang for the buck” by showing the relationship between total benefits and total costs. The BCR is thus a relative measurement of the investment’s benefits and costs.
- The ROI is frequently used in financial settings and reports the gain from the investment. It is also a relative measurement.
- The NPV reports the total difference between benefits and costs in dollar terms. It is an absolute measurement of a program’s net benefit or cost.
Because each metric calculates benefits and costs differently, it is possible for an investment to have a higher BCR and ROI, but a lower NPV than another investment. Figure 1 illustrates a hypothetical scenario in which Program A generates a higher BCR and ROI, but Program B yields a higher NPV.
Figure 1: Comparing Cost-Benefit Metrics
If you use a relative measure such as BCR or ROI to report results, you should also consider using the NPV to indicate the amount of an investment’s net cost or benefit.