BIZOMAT MAKEOS · Money
Benefit–Cost Ratio
Do the discounted benefits of this project exceed its discounted costs, and by how much?
Present value of annual benefits and costs, initial investment and salvage at a discount rate, the benefit–cost ratio and the net benefit.
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How this tool works
Inputs, units and where to find them
| Input | Unit | Typical source |
|---|---|---|
| Initial investment | AUD | Up-front cost. |
| Annual benefits | AUD/yr | Yearly benefits (savings, extra margin). |
| Annual operating costs | AUD/yr | Yearly costs of running the project. |
| Salvage value | AUD | Value recovered at the end. |
| Life | years | Years of benefits. |
| Discount rate | % | Your organisation’s discount rate. |
What each input means
Open an input to see what it is, its units, the worked example and the common mistakes, with a small diagram.
What this means: Initial investment
- What it is
- The cash spent at the start of the project to put it in place: equipment, installation, design and commissioning.
- Units and format
- Enter a number in AUD: Australian dollars. The form accepts 0 AUD or more. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with 100000 AUD as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- A larger investment raises the present value of costs and lowers the ratio.
What this means: Annual benefits
- What it is
- The yearly benefit the project delivers, such as cost savings or extra margin, assumed the same each year of its life.
- Units and format
- Enter a number in AUD/yr: Australian dollars per year. The form accepts 0 AUD/yr or more. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with 30000 AUD/yr as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- The present value of benefits and the ratio rise in direct proportion.
- Get it right
- Count only benefits that become real cash or capacity you will use.
What this means: Annual operating costs
- What it is
- The yearly cost of running the project once it is in place: maintenance, energy, licences, consumables and support.
- Units and format
- Enter a number in AUD/yr: Australian dollars per year. The form accepts 0 AUD/yr or more. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with 5000 AUD/yr as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- Higher running costs raise the present value of costs and lower the ratio.
- Get it right
- Do not include the initial investment here; it has its own field.
What this means: Salvage value
- What it is
- The amount recovered at the end of the project’s life, for example from selling the equipment, which reduces the present value of costs.
- Units and format
- Enter a number in AUD: Australian dollars. The form accepts 0 AUD or more. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with 10000 AUD as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Get it right
- Use a cautious estimate; it is discounted over the full life.
What this means: Life
- What it is
- The number of years over which benefits and running costs are counted, normally the useful life of the project or the period your organisation uses for appraisals.
- Units and format
- Enter a number in years: years. The form accepts 1 years to 100 years. Use a whole number. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with 6 years as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- More years add more discounted benefits and costs.
What this means: Discount rate
- What it is
- The yearly rate used to convert future amounts into today’s money, set by your organisation as its discount or hurdle rate.
- Units and format
- Enter a number in %: percent: the number is read as a percentage, so type 8 for 8 %. The form accepts 0% to 100%. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with 8% as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- A higher rate shrinks the present value of future benefits, costs and salvage.
- Get it right
- Type the percentage itself, not a fraction. A zero rate ignores the time value of money.
Method and formulas
- PV benefits = B × P/A(i, n); PV costs = P + C × P/A(i, n) − S × P/F(i, n).
- Conventional B/C = PV benefits ÷ PV costs; modified B/C = (PV benefits − PV operating costs) ÷ (P − PV salvage).
- Accept when B/C > 1.
- Example: the default project has B/C = 1.1873.
Limitations
- Level annual amounts; uneven flows need the IRR tool’s year-by-year inputs.
- Example values are illustrations. Replace them with values for your actual task.
Typical uses
- Rank improvement projects
- Present a project case to management
- Compare with NPV and IRR results
Who it is for
- Engineering managers
- Cost estimators
- Finance and business analysts
What you get
- Present value of benefits and costs
- Benefit–cost ratio (conventional and modified)
- Net present benefit
Interpreting the result
- B/C and NPV agree on accept/reject; for ranking projects of different size, compare incremental B/C.
References
- Machinery’s Handbook, 29th edition (Industrial Press, 2012), printed pp. 140–144. Topic reference; no source tables or recommended settings are reproduced.
Learn the Concepts Behind This Tool
These BIZOMAT Library readings explain the method this tool uses, with worked examples.
Method explained here · BIZOMAT original book
Efficiency, load profile and the cost of losses
In Distribution Transformers by the Numbers
What it covers: How to work out yearly losses from a load profile, check efficiency against Australia's minimum energy rules, and compare transformers by total cost of ownership, not price.
Method explained here · Library collection
Cost-benefit analysis for business decisions: a practical method with a worked equipment example
In Investment Appraisal and Business Cases
What it covers: How to compare all the costs and benefits of a decision, including hidden, opportunity and intangible ones, then test it with payback, NPV and sensitivity, using a worked machine purchase.
Method explained here · BIZOMAT original book
Comparing bespoke and modular: cost, time and risk
In Modular Projects by the Numbers
What it covers: A$10.32m against A$8,446,131, break-even at the fourth cell, the last cell in week 92 or 68, borrowed cost ratios for the risk, and a comparison that left out A$520,000.
BIZOMAT tools are screening and decision-support utilities. Verify important financial, engineering, safety, legal or operational decisions using appropriate professional standards and your organisation’s approved data.