Net Benefits and Benefit: Cost Ratios

Adding up all the costs and benefits of a scheme, converted into NPVs at a single year, allows us to calculate two very important measures.

  1. Net Benefits tells us whether a scheme is actually worthwhile as a whole. This number, presented as a Net Present Value, sums up all the benefits, including time savings for passengers and road users, and subtracts the costs. If the number is positive, then the scheme is likely worthwhile.
  2. Benefit:Cost Ratio shows how confident we need to be of the cost and revenue figures. These figures can only ever be estimates, and estimates can be wrong. However, if the Benefit:Cost Ratio is, say, 3.0, then we can have a high level of confidence that a scheme is worthwhile. The actual costs would have to be three times higher, or revenues or other benefits one-third of what we expect, before the scheme would prove not to be worthwhile. But if the estimated Benefit:Cost Ratio is close to 1.0, then any cost overrun or ridership shortfall could bring it below 1.0, meaning the scheme as proposed is not worthwhile.