For example, $1,000 today will not have the same purchasing power in five years. PV helps PMP credential holders conceptualize the expected or future values of projects by adjusting today’s money for inflation. You need to consider inflation when calculating a project’s benefit-cost ratio, which means you need to understand the concept of Present Value (PV). This step can be tricky for many reasons, including the fact that monetary values change over time. Next, assign and calculate monetary values for the costs and benefits. What is the cost of investing in a project, such as equipment, labor, or even electricity and other utilities? What about benefits, such as profit, labor savings, or better quality products? Benefit-Cost Ratio Formula for the PMP ExamĬomparing the costs and benefits of a potential project begins with identifying them. This assumption is not always accurate! Let’s start by looking at the BCR formula used to calculate the ratio. It’s easy to assume the project with the largest BCR is the best option. If the ratio is less than 1.0, the costs outweigh the benefits. If the ratio is greater than 1.0, the benefits outweigh the costs. The benefit-cost ratio (BCR) helps summarize the relationship between a project’s costs and benefits by expressing the ratio as a decimal. A benefit-cost ratio is a tool you can use when performing a cost-benefit analysis to evaluate what projects to undertake or what value a project can bring. Cost-benefit analysis is a systemic approach to evaluating and comparing the costs and benefits of different project proposals.
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