Cost-Benefit Analysis Calculator
Evaluate whether a project is financially worthwhile by computing its Net Present Value (NPV) and benefit-cost ratio. Ideal for public policy, capital investment, and infrastructure project decisions.
About this calculator
Cost-Benefit Analysis (CBA) is a structured method for comparing the total expected costs of a project against its total expected benefits, expressed in present-value dollars. Because benefits and costs occur over time, future cash flows must be discounted back to today's value using a discount rate that reflects the opportunity cost of capital. The NPV formula used here is: NPV = (Annual Net Benefit) × [(1 − (1 + r/100)^(−n)) / (r/100)] − Initial Costs, where Annual Net Benefit = Annual Benefits − Annual Operating Costs, r is the discount rate in percent, and n is the project life in years. The bracketed term is the present value annuity factor. If NPV > 0, the project creates value above its cost of capital. The Benefit-Cost Ratio (BCR) is the present value of benefits divided by total costs; a BCR above 1.0 indicates a worthwhile project. Choosing the right discount rate is critical — higher rates penalize long-term projects more severely.
How to use
Consider a project with $100,000 initial cost, $40,000 annual benefits, $15,000 annual operating costs, a 10-year life, and a 5% discount rate. Annual net benefit = $40,000 − $15,000 = $25,000. The annuity factor = (1 − (1.05)^(−10)) / 0.05 = (1 − 0.6139) / 0.05 = 0.3861 / 0.05 = 7.722. Present value of net benefits = $25,000 × 7.722 = $193,050. NPV = $193,050 − $100,000 = $93,050. Since NPV > 0, the project is financially justified. BCR = $193,050 / $100,000 = 1.93, meaning every dollar invested returns $1.93 in present-value benefits.
Frequently asked questions
What discount rate should I use in a cost-benefit analysis?
The discount rate reflects the opportunity cost of capital — what the money could earn if deployed elsewhere. For private sector projects, companies often use their weighted average cost of capital (WACC), typically 8–12%. For public sector projects, government guidance often specifies rates: the US Office of Management and Budget recommends 7% for regulatory analysis and 3% for intergenerational comparisons. Choosing a lower rate makes long-term projects look more attractive; a higher rate favors projects with quick payoffs. Always test your conclusions with a sensitivity analysis across a range of discount rates.
How is benefit-cost ratio different from net present value and when should I use each?
NPV is an absolute dollar figure representing the total value created by the project above its cost of capital — it tells you how much richer the project makes you in today's dollars. BCR is a relative measure showing value generated per dollar invested, making it useful for comparing projects of different sizes or ranking projects when budget is limited. If you have unlimited capital, prioritize by NPV; if you must choose among competing projects under a fixed budget, rank by BCR. Both should ideally be positive/above 1.0 for a project to be approved.
What are the most common mistakes when conducting a cost-benefit analysis?
The most frequent errors include omitting important costs or benefits (especially indirect or intangible ones like environmental impact or time savings), using an inappropriate discount rate, double-counting benefits, and failing to account for risk and uncertainty. Many analyses also suffer from optimism bias — systematically underestimating costs and overestimating benefits, a well-documented phenomenon in large infrastructure projects. Best practice involves sensitivity analysis (testing different assumptions), Monte Carlo simulation for uncertainty, and independent review. Transparency about assumptions is essential so decision-makers understand the range of plausible outcomes.