what does a benefit cost ratio of 1.7 means?


Hey there,

what does a benefit cost ratio of 1.7 means?
A. costs are greater than benefits
B. Payback is 1.7 times the costs
C. profit is 1.7 times the costs
D. Costs are 1.7 times the profit

Answer C is a trick. By definition we are comparing benefits (revenue) with costs not profits. D is twice wrong.
A is wrong by definition.

Only B , but... can we compare number of time periods with costs??
Can someone elaborate?



Replies to this Topic

Benefit/cost ratio is normally used for proposals to assess at a high level. No one would normally pick a project based on a benefit/cost ratio. However, this indicator works well for small projects, or work packages of insufficient length.

For selecting larger projects or opportunities we normally use the indicator called NPV (Net Present Value), which takes in count value over time. 

From a mathematical point of view, Benefit Cost Ratio indicates how much benefit (indicated as a percentage) am I getting for each unit of cost that has been invested. A 1.7 BCR means that you are getting 1.7% units in benefit for each cost unit invested. If the ratio is 1, it means that the benefit equals the cost invested. If the ratio is less than 1, you're project is costing you more than the benefit you're receiving.

One if the issues with BCR is how you define Benefit. Dollar is the common unit, but is the project team thinking about Income, Payback, return, profit? Defining from the get-go your terms will help everyone understand your BCR computations.

@Pedro Robless: "A 1.7 BCR means that you are getting 1.7% units in benefit for each cost unit invested." - I'm not sure if I understood the 1.7% thing. Hopefully the number needs to be changed. Please verify.  

You are correct. An BCR of 1.7% means that for every unit of cost, you get 1.7% units of benefit.

What can be somewhat confusing is selecting the answer to the question. Some will argue that "payback", "benefit" and "profit" relates to the same concept. So, in projects where this is assumed (payback=profit=benefit), it might be hard to select the answer to Silvia's question. That's why I mentioned that the units to measure this and other indicators must be clearly defined and agreed early in the project planning phase.

But, based only on the data provided by Silvia, I would select "B", as "payback" is a more broad concept that "profit" and could more easily accomodate the concept of "benefit". At least in my opinion.



Edited Tue, Dec 14, 2010 8:22 PM

Thank you so much for your answers. 

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