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Cost-benefit analysis, which forms a part of most business case documents, is an economic evaluation of investment options and profitability. While there may be non-financial and qualitative aspects of project evaluation, there is usually a strong focus on quantitative evaluation or dollar benefits. There are many ways to calculate the quantitative benefits of proposed projects, with some techniques preferred to others. Among the techniques used in business case documents or justifying project investments are the computation of net present value (NPV), return on investment (ROI) or payback period.

Alternatively, project managers use profitability index or benefit-cost ratio (BCR) as a tool to calculate and compare project benefits. The BCR is the ratio of the present value of the future net cash flows to the initial capital outlay, and it provides project managers with a relative measure of an investment proposal’s desirability. If the BCR ratio is above 1, the project should be accepted, while a project with a BCR ratio of less than 1 should be rejected.

In summary, BCR shows the number of dollars of benefits per dollar of capital outlay, which may be why some prefer this method.

There is no one-size-fits all approach to calculating project benefits. The technique you use would depend on the picture you're trying to build for your audience as well as the peculiarities of the project in question.

Source: Peacock R et al. (2003), Financial Management, Person, NSW, Australia

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