I posted a question on the PMChamp Facebook – Please click and post your response here: How often do you study for the PMP exam? Benefits include but are not limited to revenue, sales, savings, increases of values of assets, interest payments received, etc. Option 3 is the most promising alternative, followed by Option 1. For instance, a project manager could be If there were an option with high These benefits and costs are treated as Benefit/Cost Ratio; Economic Value Added; Scoring Model; Payback Period; Net Present Value; Discounted Cash Flow; Internal Rate of Return; Opportunity Cost ; Before we discuss these techniques, it is important for you to understand the Discounted Cash Flow. The Benefit to Cost Ratio is calculated by dividing the Benefits by the Costs. owing to inflation, you can buy less with $1000 four years later). Benefit-cost ratio Tool/Technique. Completing quality work may cost more monies than the work is worth. forecast. Explanation: An RoI (Return on Investment = ((Revenue – Investment) / Investment) of 0.4 is the same as BCR (Benefit Cost Ratio = Revenue / Investment) of 1.4. As the BCR compares discounted benefits with discounted costs, it offers a good indication of how big a ‘buffer’ between benefits and costs is. While it is common that the NPV and BCR produce a similar ranking of options, this is not necessarily always the case. Cost-benefit analysis provides valuable information, such as: 1. I would like to give special thanks to PMC Lounge and Shoaib for the awesome video that helps me a lot to pass the PMP exam. The benefit cost ratio is a common indicator of the profitability of a potential investment or project. Everyone commented on how excited they were to have all new facilities. Buyer share ratio (BSR) = 60% or 0.6 Buyer’s share of cost overrun = Cost overrun x BSR = 41,666 * 0.6 = 25,000 Amount buyer pays at PTA = Target Price + Buyer’s share of cost overrun = 75,000 + 25,000 = $100,000 (= Ceiling Price) From here on, even if the actual cost rises to $150,000 (or more), buyer still pays $100,000 only. The consideration of absolute amounts of cost and benefits sets this ratio apart from many other indicators. May life bring you peace. as the sum of discounted benefits. Option 2 has discounted benefits exceed the present value of the costs and investments. Passed my PMP exam with 'Above Target' in 4 domains & 'Target' in 1. https://www.pmclounge.com/testimonials/arif-shah-syed-pmp/. understand the meaning and calculation of the cost-to-benefit ratio. 1.2.6.4, p. 34). Definition, Formula, Example. The present value of costs is calculated analogously that of the benefits. for a project with lower investments and costs and higher benefits and I had taken the "official" CAPM course from PMI but was struggling with the material. https://www.pmclounge.com/testimonials/krishna-kulkarni-pmp/, Click to share on Twitter (Opens in new window), Click to share on Facebook (Opens in new window), Part 2 – Economic Snapshot of Project Management Industry. benefit cost ratio are typically monetary values stemming from a business It covers all topics of PMP , FAQs and very importantly some of new topics which are interesting and very useful. However, there are certain types of I want to thank you for your efforts making free youtube videos for us! ‘inherent riskiness’ of forecasted net cash flows and profitability, e.g. What Are Leads and Lags in Project Management? Thank you again and best wishes, https://www.pmclounge.com/testimonials/prakash-sapkota-pm/. Do remember to post your answer in the comments. Thereby, both amounts should The benefit cost ratio (or benefit-to-costratio) compares the present value of all benefits with that of the cost andinvestments of a project or investment. It explains the terms social CBA and economic analysis, which are used in the public sector. How often do you study for the PMP exam? To determine this sum, all inflows in a This calculation needs to This is a combination of formulas, values and acronyms from various PMP exam prep sources. Once the cash flows are estimated, they are Your emphasis on words and the way you speak makes it interesting and easy to understand. The present value of the benefits in a The benefit-cost ratio or BCR is an effective indicator in cost-benefit analysis. The BCR translates the absolute So I hope you got the message. NPV relies on the assumptions of the discounting model, which are not … period (i.e. PMP Formulas PDF. Highly recommend for PMP aspirants if anyone looking for exam preparation sources. A BCR is the ratio of the benefits of a project or proposal, expressed in monetary terms, relative to its costs, also expressed in monetary terms. the particular type of analysis. PMCLounge.com is the number 1 *free* PMP resource on the internet | Get certified in 7 weeks! D. Not enough information to calculation, Benefits = $2,000,000 and Costs = $1,000,000. This situation is obviously regulatory or legal requirements. The Benefit-Cost Ratio (BCR), or profitability index, is a commonly used project management tool often used to identify the most efficient projects. BCR values: Read on to learn more about the https://www.pmclounge.com/testimonials/dan-sandifer-capm/. Tools and Techniques. or quantifiable benefits to cover the costs, e.g. I have recently passed my PMP exam. If you use the latter, make sure The BCR can be used to supplement this missing piece of information. You can find all the mentioned PMP formulas in this PMP formulas pdf. I have given a thumbs up to many of them and will recommend them to everyone. These assumptions can significantly impact the outcome of a benefit cost analysis without considering the inherent insecurities of these parameters (read the corresponding discussion of assumptions in, Present Value of Costs:               12,009, Present Value of Benefits:           13,424, Present Value of Costs:               18,510, Present Value of Benefits:           18,325, Present Value of Costs:                 9,238, Present Value of Benefits:           11,003. An updated version of the Benefit/Cost Ratio Analysis can be used as a quick and easy "back of the envelop" way to estimating viability. analysis of 3 different software options. general rule is that the higher the BCR the greater the profit an investment cost ratio consists of three components: The present value of all benefits, the The benefit-to-cost ratio (BCR) is a financial ratio that's used to determine whether the amount of money made through a project will be greater than the costs incurred in executing the project. The formula for Calculating BCR = PV of Benefit expected from the Project / PV of the cost of the Project = 70715.28 /-50,000.00 BCR =1.41 Since the Benefit-Cost ratio is greater than 1, the renovation decision appears to be beneficial. This is the consolidated formula (source): where: BCR = Benefit Cost Ratio PV = Present Value CF = Cash Flow of a period (classified as benefit and cost, respectively) i = Discount Rate or Interest Rate N = Total Number of Periods t = Period in which the Cash Flows occur. investments of a project or investment. Definition and Meaning of Benefit Cost Ratio, Advantages and Disadvantages of the Benefit-to-Cost Ratio. Return-on-Investment or ROI is the ratio of Return to Investment. learn the definition of the BCR and how it is calculated. cost one million dollars and you expect or the and were to sell the main deliverable for $1.5 million, then your BCR is $1.5 million divided by one million dollars which gives you a result of 1.5 to 1 Thank you! Completing quality work increases productivity. investments and costs and a small relative profit margin, the NPV would present Thank you! Otherwise, this indicator is not applicable to PMC Lounge is excellent learning platform thank a ton to Shoaib Qureshi for high quality and knowledgeable videos specially on PMP. It also helped me to have better knowledge on strategy to clear PMP at a one go. more preferable than options with a BCR lower than 1. I found out about your channel just 2 weeks before the exams. flows in relation to the time of their occurrence, The BCR alone does not indicate the liquidity / funding aspects of the analyzed options, e.g. B. Thank you. B. Generally, PMP Exam cost includes exam fee, membership fee, PMP study guide and PMP Question Bank . A. amounts. I wish PMC Lounge continues this journey. organization (often used for assessment of projects) or a risk-adjusted market 20 The negative cost-benefit ratio means the project is … an equivalent should be used. https://www.pmclounge.com/testimonials/ankit-mishra-pmp/. 12% which is reflected in a corresponding discount rate. Daily, 2-3 times per week, or lesser? A. Then they try to find which project is more profitable. As the BCR is focusing on the relative profitability, the larger the end of the projection’s time horizon, which may be the expected market cash flows considered as benefits) need to be discounted with 1 Apart from the benefit cost ratio, there You'll also need a second list of the benefits the business will receive after successfully executing the project. We have gone through the 15 PMP formulas you must know to answer PMP math questions correctly. Examples of cost cash flows are the initial investments, expenses for the creation of products or results, administrative costs, disposal costs, etc. Benefit. Discounted Cash Flows and Calculated Benefit Cost Ratios, Scope Baseline: Definition | Example | 4-Step Guide | Uses, Cost-Benefit Analysis Checklist for Project Managers (Free Download), Stakeholder Engagement Assessment Matrix: Uses & Example, Agile Release Planning in Hybrid and Agile Projects, Definitive Estimate vs. ROM/Rough Order of Magnitude (+ Calculator), Project Schedule Network Diagram: Definition | Uses | Example, PDM – Precedence Diagramming Method [FS, FF, SS, SF] (+ Example). Note that the numbers used in this example are consistent with the NPV example. Discounted Cash Flow. perpetuity, an infinite series of cash flows. It is often used to supplement comparisons based on the net present value. Since there are inflation/deflation, $1000 now does not have the same purchasing power as $1000 in four years (i.e. the following result tables: If the 3 options are ranked by their BCR, of cash flows equals the likewise discounted costs. If you have consistently used negative cash flows for either the cost or the benefit side, your result will be negative. Generally, what is the best explanation for why this occurred? be absolute, i.e. In general, pursuing investments with a Cost-benefit analysis is a simple tool for evaluating the costs of a project versus the benefits. For the interpretation, refer to the following 3 generic ranges ofBCR values: Read on to learn more about theinterpretation of BCR results. Time value of the profit 3. I followed your channel based upon my colleague's suggestion and the best part I liked about PMC Lounge is that it's cool & has a well-curated content, unlike other long boring videos. Cost Benefit Analysis (also known as Benefit Cost Analysis) is a mathematical approach to compare the The given below is the Benefit Cost Ratio example problem which will help you to understand the concept of benefit-cost ratio analysis in a simple manner without any complications. A benefit–cost ratio (BCR) is an indicator, used in cost–benefit analysis, that attempts to summarize the overall value for money of a project or proposal. Just wanted to let you know that your youtube video is awesome. This article discusses estimating the value of benefits of public-sector projects. this option in a more favorable way as it discounts the absolute profitability May you and all your loved ones be happy, healthy and successful. As soon as I start working again, I am going to make a donation or two. How Is the Benefit Cost Ratio Calculated? The relationship between the cost and benefits of a project can be identified and analysed using this BCR analysis. monetary cash flows or their equivalents, e.g. the implementation of BCR < 1 – the project will cause the organization to lose money … ratio) compares the present value of all benefits with that of the cost and You are a Rockstar!! I like the style Mr. Shoaib delivers the lectures. Define the discount or interest rate of be performed for every period. Best wishes to keep growing and spreading the knowledge. https://www.pmclounge.com/testimonials/imran-khan-pmp/. Cash flows need to be estimated separately for benefits and costs. But what about public-sector entities? A BCR is the ratio of the benefits of a project or proposal, expressed in monetary terms, relative to … other options. A supplier went out of business and a new one needed to be found. What is the Benefit-Cost Ratio (BCR) of the project? https://www.pmclounge.com/testimonials/kiran-joshi-pmp/. You might also consider a residual value at It compares the expected costs of the project to the potential benefits it could bring to the organization. Its meaning depends on the value it is In these cases, the BCR indicates the relation of costs and benefits. - Project Management MCQ Project Management MCQ PMP Chapter 8 The project CPI is 1.02, the benefit cost ratio is 1.7, and the latest round of performance reviews identified few needed adjustments. The calculation of the BCR requires 3 input Benefit-Cost Ratio or BCR is the ratio of Benefit to Cost. project options. are other important quantitative and qualitative considerations though – in PMP Question & Answers with explanation. In fact, a day before my exam, I did nothing but went through all your videos again. PTA= [(Ceiling Price − Target Price)/ Buyer′s Sharing Ratio )]+ Target cost. Now, the cost-benefit ratio will be calculated as – Net Present Value / Initial Investment Cost = $531,406 / $500,000 = 1.06. Benefit Cost Ratio C. Sunk Cost D. Fixed Cost. PMP Question No 2092 - Cost. for non-monetary benefits orcompany-internal costs. PMI Certification Types | Which certification is right for you? The project will incur a constant cost of $10,000 each month (payable by the end of each month) giving a total cost of $120,000 for the project. alternatives with a benefit-to-cost ratio exceeding 1, they are likely to be dividing the present value of benefits by that of costs and investments. What Is the Benefit Cost Ratio (BCR)? group of cash flows separately. indicating. I just want to thank you for the helpful videos you publish on YouTube. To calculate the BCR, the present value of The formula for Net Present Value formula is:Net Present Value (NPV) = Σ (Pi / (1+ r) n) – Ciwhere Pi is cash inflow; r is interest rate; n is time periods; Ci is initial cost.Let’s introduce the concept of Present Value (PV) first. Therefore project A has the maximum financial return. BCR > 1 – the project is profitable, and the higher the BCR the better. Your videos where a material very important for this achievement, I saw almost half or your YouTube videos, this helped me clarify many doubts an improve my project management vocabulary in English (my mother language is Spanish). A manufacturing project has a Schedule Performance Index (SPI) of 0.89 and a Cost Performance Index (CPI) of 0.91. A critical path activity took longer and needed more labor hours to complete. projects that need to be conducted even if they are not generating sufficient tangible present value of all costs and, finally, the division of these present values. Nancy is carrying out cost-benefit analysis for a project. benefits is divided by the present value of costs. The PMI Project Management Body of Knowledge lists the BCR under project success measures, next to the net present value and return on investment (source: PMBOK, 6th edition, part 1, ch. In order to adjust for inflation/deflation, Present Value (PV) is introduced. You will then need to multiply it with (-1). Doing these steps leads to for non-monetary benefits or Notify me of follow-up comments by email. Shoaib is doing a really fantastic job by explaining the complex project management terms with ease. BCR is expressed as follows: BCR = Benefits/Costs . company-internal costs. While it does not cover all aspects of a cost benefit analysis, it indicates whether an option is beneficial. The present value of benefits is calculated https://www.pmclounge.com/testimonials/aadil-feroze-pmp/. The sum of discounted benefits is parameters for each period: The cash flows used for calculating the non-negative. In these cases, the option with the highest https://www.pmclounge.com/testimonials/nazwa-salim/. I recently passed my PMP exam last Dec 17, 2020 with only 2 months to review. consequently divided by the sum of discounted costs. 1091. Thank You! https://www.pmclounge.com/testimonials/judy-thang/. Note that in this formula, both present values need to be inserted with their absolute, non-negative amounts. Enter your email address to subscribe to PMC Lounge and receive notifications of new posts by email, I am writing from the other side of the world (Bogota, Colombia), and wanted to tell you that yesterday I succeed on the. I have been in working in IT for many years and unfortunately, have been on furlough since March. In project management, the benefit cost ratio can support the cost-benefit analysis of a business case. How Project Management Software Improves Productivity, Estimating Activity Durations: Definition, Methods, Practical Uses, Bottom-Up Estimating – Definition, Example, Pros & Cons, Performance Prism for Performance & Stakeholder Management, Balanced Scorecard in Project Management – Uses, Pros & Cons, Number of Communication Channels (+ PMP® Formula & Calculator), How to Do Analogous Estimating – an Illustrated 5-Step Guide. you split the infinite cash flows into cost and benefits and discount each Once this process completes, they develop the project charter. Otherwise, the costs are greater than the benefits. https://www.pmclounge.com/testimonials/namratha-maddirala-pmp/. may consider using different interest rates among the projection period or C. The scope was changed. I passed the CAPM exam last Friday achieving above target on twelve of the thirteen topics (the last achieving target) and I attribute it to your videos. A benefit cost ratio of greater than 1 means the benefits are greater than the costs. We have prepared a PMP Formulas PDF including all these formulas. While the NPV is based on the net amount of these margins only, the BCR would be greater Since BCR = Benefits / Costs = $2,000,000 / $1,000,000 = 2. $1,300,000 $1,500,000 $80,000 $1,125,000 – correct answer Definition Benefit-Cost ratio is the ratio of the benefits of a project compared to the costs calculated in terms of Present Value (PV). A benefit-cost ratio (BCR) is an indicator showing the relationship between the relative costs and benefits of a proposed project, expressed in monetary or qualitative terms. Performing a cost-benefit analysis (CBA) in companies that are in the business of making money is logical. I passed my PMP exam last week and just wanted to say a BIG thank you for all the wonderful resources and videos you have been providing for PMP aspirants like me. Provide the Definition and formula for CPI. I have passed PMP a few days back. C. 2 discounted benefits. Videos really helped me clear my concepts and were interesting to watch as well. I am really happy that I could get in touch with PMC Lounge's regular videos that clarified my concepts and ideas. The Formula for calculating the benefit The same holds basically true for different A project is currently spending $1,000000 per annum on necessary expenses, and is earning a revenue of $1,500000. Its meaning depends on the value it isindicating. A financial benefit measurement method. revenues, regardless of the net amounts. It is expected that an increase in revenue of $2,000,000 (NPV) would be realized once the project is complete. interpretation of BCR results. cases where small profit margins are prone to a higher risk while large margins Your email address will not be published. If you compare investment alternatives, series of cash flows is lower than the present value of the corresponding costs. your BCR analysis. BCR > 1 – the project is … discounted to their present value. The total cost of a project being undertaken is $1,000,000 (NPV). Value Analysis – Bringing the Cost down without reducing the Project Scope, How to remember EVM formulas – SV, SPI, CV, SPI, Sensitivity Analysis using Tornado Diagrams, Performance Reviews | Root Cause Analysis (RCA) | Inspection | Testing / Product Evaluations – Tools of Control Quality Process, BCR > 1 – the project is profitable, and the higher the BCR the better, BCR < 1 – the project will cause the organization to lose money and is generally considered as not a good investment. Read on to CV = EV - AC Negative=over budget=bad Positive=under budget=good. Ideally speaking, you will not be required to calculate BCR in the PMP exam. The present value of benefits of a series divisor of the BCR (due to higher costs) would likely push this option behind A project manager is performing the cost-benefit Expect the value of BCR to be given in the question where you can select the highest as being most favorable. The company expects a return rate of The PMC Lounge channel is one of the very best resources on YouTube for aspiring PMPs, the videos are extremely clear, not distracting and superbly delivered by Shoaib Qureshi. Keep up the great work, your channel is invaluable! A benefit-cost ratio (BCR) is an indicator, used in the formal discipline of cost-benefit analysis, which attempts to summarize the overall value for money of a project or proposal. The result of the net present value (NPV) calculation is one single figure that represents the expected net value of all cost and benefit without giving an idea of the volume and the relation of the underlying gross cash flows. 0.5 Investment option is neither profitable nor lossy. https://www.pmclounge.com/testimonials/jj-acot-pmp/, Thank you PMC Lounge and Shoaib for all the wonderful materials and tips. https://www.pmclounge.com/testimonials/a-m-al-amin-pmp/. You make it so simple with a clear explanation. For the interpretation, refer to the following 3 generic ranges of favored. It begins (as most things do) with a list of every single project expense, including the direct and indirect costs such as overhead. We will discuss them in this subsection. For further details on these parameters and related considerations, read the respective section of our net present value introduction. Project Management for Non-Project Managers, Project Management Basics – Introduction and Fundamentals, PMP Experience of Certified Professionals. Benefit-Cost ratio is the ratio of the benefits of a project compared to the costs calculated in terms of Present Value (PV). The revenue from the project is collected on a quarterly basis. The basis to compare the projects The lower the BCR, the higher the excess of discounted costs compared to the Required fields are marked *. applying different risk-adjusted rates to certain types of costs and benefits. involve products or results with differences in their profit margins. This value range indicates that the The benefit cost ratio (or benefit-to-cost When comparing projects using BCR, the project with the greater BCR is the better choice. Cost Variance: Provides cost performance of the project to determine if the project is going as planned. Expected Profit 2. assess different project options or prepare for your PMP exam, you will want to However, like all other indicators, the BCR should not be used as the only basis for project or investment decisions given that it only covers certain aspects of a project option. value (benefit), disposal cost (a cost cash flow) or the present value of a Thank you for these videos and for making them free. BCR (yet below 1) may be the least unprofitable implementation scenario. You are running a project for a customer based on a cost-reimbursable contract with the following terms: Target costs: $ 1,000,000 Fixed fee: $ 100,000 Benefit/cost sharing: 80% / 20% Price ceiling: $ 1,200,000 Which is the PTA (= point of total assumption, break point) of the project? The BCR is derived from the mathematics of Net Present Value (NPV), which was designed to model situations where a substantial initial investment is followed by an ongoing revenue stream.