Which ratio summarizes the overall relationship between relative costs and benefits of a proposed project?

Which ratio summarizes the overall relationship between relative costs and benefits of a proposed project?

• A. Time Value of Money
• B. Cost-Benefit Ratio
• C. Deflation
• D. Equivalent Annual Cost or Benefit

Answer: (B)

Expressing the relationship between costs and benefits as a ratio is what this item is about. The cost-benefit ratio captures the value of benefits relative to the costs, usually using discounted present values. You compute it by dividing the present value of benefits by the present value of costs. The idea is simple: a ratio above one means the project delivers more value than it costs, making it financially attractive; below one means costs exceed benefits and the project isn’t worth pursuing; exactly one means you break even. This single number is the standard way to summarize whether a proposed project adds worth. Deflation isn’t about comparing costs and benefits; it’s a macroeconomic phenomenon of falling price levels. Time Value of Money is the principle that money now is worth more than the same amount in the future, which underpins calculations like the present value used in the ratio, but it’s not itself a ratio. Equivalent Annual Cost or Benefit is a method to convert costs or benefits to an annualized figure to compare projects with different lifespans, rather than the overall ratio itself.

Expressing the relationship between costs and benefits as a ratio is what this item is about. The cost-benefit ratio captures the value of benefits relative to the costs, usually using discounted present values. You compute it by dividing the present value of benefits by the present value of costs. The idea is simple: a ratio above one means the project delivers more value than it costs, making it financially attractive; below one means costs exceed benefits and the project isn’t worth pursuing; exactly one means you break even. This single number is the standard way to summarize whether a proposed project adds worth.

Deflation isn’t about comparing costs and benefits; it’s a macroeconomic phenomenon of falling price levels. Time Value of Money is the principle that money now is worth more than the same amount in the future, which underpins calculations like the present value used in the ratio, but it’s not itself a ratio. Equivalent Annual Cost or Benefit is a method to convert costs or benefits to an annualized figure to compare projects with different lifespans, rather than the overall ratio itself.