The Benefittocost Ratio

The benefit to cost (B/C) ratio is a benchmark that is determined by taking the total present value of all of the financial benefits of a water treatment project and dividing it by the total present value of all the costs of the project. If the ratio is greater than unity, then the benefits outweigh the costs, and we may conclude that the project is economically worthwhile. The present values of the benefits and costs are kept separate, and expressed in one of two ways. First, as already explained, there is the pure B/C ratio, which implies that if the ratio is greater than unity, the benefits outweigh the costs and the project is viable. Second, there is the net B/C ratio, which is the net benefit (benefits minus costs) divided by the costs. In this latter case, the decision criteria is that the benefits must outweigh the costs, which means that the net ratio must be greater than zero (if the benefits exactly equaled the costs, the net B/C ratio would be zero). In both cases, the highest B/C ratios are considered as the best projects. The B/C ratio can be misleading. For example, if the present value of a filter press' benefits were $10,000 and costs were $6,000, the B/C ratio would be $10,000/56,000 or 1.67. But what if, upon further reassessment of the project, we find that some of the costs are not 'true' costs, but instead simply offsets to benefits? In this case, the ratio could be changed considerably. For argument sake, let's say that $4,500 of the $6,000 total cost is for lower energy costs over say a thermal dewatering technology, and that $7,000 of the $10,000 in benefits is due to power savings; one could then use them to offset each other. Mathematically then, both the numerator and denominator of the ratio could be reduced by $4,500 with the following effect:

Without changing the project, the recalculated B/C ratio would make the project seem to be considerably more attractive.

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