What is the difference between the Payback Period and the Benefit-Cost Ratio Method?
Loading ... Civil Engineers Blog

top page

Latest News

top post page

Home What is the difference between the Payback Period and the Benefit-Cost Ratio Method?

What is the difference between the Payback Period and the Benefit-Cost Ratio Method?

Font size

 




What is the difference between the Payback Period and the Benefit-Cost Ratio Method?


What is Payback period method?

The payback period is another economic model for project selection. The payback period is the number of time periods it takes to recover the investment of a project. Therefore, projects with a shorter payback period should be selected.

For example, if a company invests $ 200000 for a project and the payback period is 8 months, the product or outcome of the project will bring $ 200000 in 8 months. Then it will start to make a profit.

Briefly, the payback period is when the project will cover the investment made to complete the project.  

What is Benefit-Cost Ratio Method?

The benefit-cost ratio is another economic model used for project selection. This model estimate projects to determine what work should be done. Also, an estimation of the benefits of the projects is done.

Then, the benefits of the project are compared against the cost of the project. Here the benefits can consider as revenue will be gain from outputs of a project.

If the benefit-cost ratio is greater than one, this means the benefits of the project are more than the cost of the project.

If the benefit-cost ratio is equal to one, this means the benefit of the project is equal to the cost of the project.

If the benefit-cost ratio is lower than one, this means the benefit of the project less than the cost of the project.

Therefore, projects with a higher benefit-cost ratio should be selected because this means the revenue of the project or any other advantages that the project will bring, is higher than the cost of the project. And this will bring profitable, or advantages results respectively.

If the benefit-cost ratio is less than one, the project should not be executed because the project will not generate profits or advantages results.


Labels:
No comments
Post a Comment