Which ratio is used to assess the relationship between benefits and costs?

The Benefit/Cost Ratio is specifically employed to evaluate the relationship between the benefits derived from a project or investment and the costs incurred to achieve those benefits. This ratio provides a clear numerical indication of the efficiency and value of a project, allowing decision-makers to discern whether the anticipated benefits justify the costs. A ratio greater than one suggests that the benefits outweigh the costs, making the project worthwhile, while a ratio less than one indicates that the costs surpass the expected benefits, signaling potentially poor investment.

In contrast, other ratios such as Net Present Value (NPV) primarily focus on the total value that a project brings when future cash flows are discounted back to their present value, while the Payback Period measures how long it takes to recover initial investments, without considering any cash flows beyond that point. The Internal Rate of Return (IRR) reflects the rate of return at which the net present value of cash flows from an investment equals zero, but it does not directly compare the total benefits to costs. The Benefit/Cost Ratio, therefore, stands out as the metric dedicated to assessing this crucial relationship.