Benefit–cost ratio

In the absence of funding constraints, the best value for money projects are those with the highest net present value (NPV). Where there is a budget constraint, the ratio of NPV to the expenditure falling within the constraint should be used. In practice, the ratio of present value (PV) of future net benefits to expenditure is expressed as a BCR. (NPV-to-investment is net BCR.) BCRs have been used most extensively in the field of transport cost–benefit appraisals. The NPV should be evaluated over the service life of the project.

A further complication with BCRs concerns the precise definitions of benefits and costs. These can vary depending on the funding agency.

BCR = Discounted value of incremental benefits ÷ Discounted value of incremental costs