What are the three measures used to interpret results of benefit-cost analysis for a decision?

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Multiple Choice

What are the three measures used to interpret results of benefit-cost analysis for a decision?

In benefit-cost analysis, you judge whether a decision adds value by looking at how future benefits compare to future costs after adjusting for the time value of money. The three summary measures most commonly used are: - Net present value: subtract the present value of costs from the present value of benefits. A positive NPV means the project adds value above the cost of capital, and a larger positive NPV indicates more value. - Benefit-cost ratio: divide the present value of benefits by the present value of costs. A ratio greater than 1 shows that benefits exceed costs, with higher ratios indicating more value per dollar invested. - Internal rate of return: the discount rate that makes the net present value equal to zero. If the IRR exceeds the required rate of return, the decision is favorable; IRR provides a percentage return expectation. Other options don’t serve as primary interpretation metrics. Payback period and break-even point focus on how long it takes to recover investment rather than overall value. Sensitivity analysis is about testing robustness under different assumptions, not a single summary measure. Net income, ROI, and profitability index are related concepts but ROI doesn’t account for time value, and profitability index is essentially another name for the benefit-cost ratio. Discount rate, present value, and total costs are inputs or components, not standalone interpretation measures.

In benefit-cost analysis, you judge whether a decision adds value by looking at how future benefits compare to future costs after adjusting for the time value of money. The three summary measures most commonly used are:

  • Net present value: subtract the present value of costs from the present value of benefits. A positive NPV means the project adds value above the cost of capital, and a larger positive NPV indicates more value.

  • Benefit-cost ratio: divide the present value of benefits by the present value of costs. A ratio greater than 1 shows that benefits exceed costs, with higher ratios indicating more value per dollar invested.

  • Internal rate of return: the discount rate that makes the net present value equal to zero. If the IRR exceeds the required rate of return, the decision is favorable; IRR provides a percentage return expectation.

Other options don’t serve as primary interpretation metrics. Payback period and break-even point focus on how long it takes to recover investment rather than overall value. Sensitivity analysis is about testing robustness under different assumptions, not a single summary measure. Net income, ROI, and profitability index are related concepts but ROI doesn’t account for time value, and profitability index is essentially another name for the benefit-cost ratio. Discount rate, present value, and total costs are inputs or components, not standalone interpretation measures.

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