Cost-Benefit Ratio

5 minutes 5 Questions

Cost-Benefit Ratio (CBR) is another indispensable part of Cost Benefit Analysis. The Cost-Benefit Ratio is calculated by dividing the proposed total benefits by the estimated total costs. This ratio gives an insight into the relationship between costs and benefits of a project. If the ratio is greater than 1, it indicates that the total benefits of the project outweigh the total costs. On the other hand, a ratio less than 1 indicates that the costs are greater than the benefits which is not desirable. It's a quick tool for decision-making since it summarizes the relationship between costs and benefits into a single numerical value.

Guide: Understanding and Answering Questions on the Cost-Benefit Ratio

Cost-Benefit Ratio: The Cost-Benefit Ratio (CBR) is a systematic approach to estimate the strengths and weaknesses of alternatives in business. It's a quantitative method that calculates and compares benefits and costs of a project to ascertain if it's a sound investment.

Why it's important: Cost-Benefit Ratio is a vital decision-making tool. It helps organizations to choose the most economically viable option among multiple alternatives.

How it works: In simple terms, the Cost-Benefit Ratio calculates the ratio between the cost of a project and the expected benefits (in monetary terms). If the ratio is less than 1, the project is considered not profitable, and if it is more than 1, the project is profitable. It's calculated as follows: Cost Benefit Ratio = Cost of the Project / Benefit of the Project.

Exam Tips - Answering Questions on Cost-Benefit Ratio:
1. Understand the concept: Make sure you understand what Cost-Benefit Ratio is and how it's applied.
2. Show your work: Write out your calculations step-by-step to gain partial credit, even if your final answer is incorrect.
3. Interpret the results: Don't just calculate the ratio, learn to interpret the results. If the benefit-cost ratio is more than 1, it indicates a positive return on investment, and vice versa.
4. Real-world Application: Try to relate your answers to real-world scenarios to demonstrate your understanding of how the ratio is used in practice.

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Question 1

A project with a Cost-Benefit Ratio less than 1 means?

The project's benefits are higher than the cost The project's cost is higher than its benefits The project isn't viable The project's cost equals to its benefits

Correct Answer: The project's cost is higher than its benefits

A project with a Cost-Benefit Ratio less than 1 indicates that the project's cost is higher than its benefits. This is because the cost-benefit ratio is calculated by dividing the benefits of a project by its costs. A result less than 1 means the costs are more than the benefits. Answer 153691 is incorrect because the project's benefits are not higher than the cost. Answer 153692 is partially correct but doesn't fully capture the meaning of a cost-benefit ratio less than 1 - while it might suggest project is not viable, it's possible to still continue with a high cost project if the benefits, while less in monetary terms, still meet strategic or mandatory objectives. Answer 153693 is incorrect because a cost-benefit ratio of 1 means the project's cost equals to its benefits, not less.

Question 2

You are managing a software development project with an initial cost of $1,000,000 and projected benefits of $3,000,000. Due to unexpected testing expenses, the costs increase to $1,200,000. What is the new cost-benefit ratio?

2:1 1.2:1 3:1 2.5:1

Correct Answer: 2.5:1

The cost-benefit ratio is calculated by dividing the costs by the benefits. In this case, the new costs are $1,200,000 and the benefits remain $3,000,000. When you divide $1,200,000 by $3,000,000 you get 0.4. Therefore the new cost-benefit ratio is inverted to be 2.5:1. The answer '2.5:1' is the correct one, as the ratio has correctly accounted for the increased costs. The other answers are incorrect because they either don't reflect the revised costs ('3:1' and '2:1') or misrepresent the ratio ('1.2:1').

Question 3

You are leading a new project with an initial projected cost of $500,000 and estimated benefits of $1,000,000. Due to a slight issue in production, the additional cost incurred is $100,000. What would be the new cost-benefit ratio?

0.8 0.6 0.75 0.67

Correct Answer: 0.6

To calculate the new cost-benefit ratio, we need to find the new total cost and then divide the estimated benefits by the new total cost. Given: - Initial projected cost: $500,000 - Estimated benefits: $1,000,000 - Additional cost incurred: $100,000 Step 1: Calculate the new total cost New total cost = Initial projected cost + Additional cost incurred New total cost = $500,000 + $100,000 = $600,000 Step 2: Calculate the new cost-benefit ratio New cost-benefit ratio = Estimated benefits / New total cost New cost-benefit ratio = $1,000,000 / $600,000 = 1.67 To convert the ratio to the options given, we need to divide 1 by 1.67. 1 / 1.67 = 0.6 (rounded to the nearest option) Therefore, the new cost-benefit ratio is 0.6.

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