• Lesson 4: Payback Period and Cost Benefit Analysis
  • Payback Period
  • Benefit to Cost Ratio

Lesson 4: Payback Period and Cost Benefit Analysis

Payback Period

The minimum time required such that the revenue pays back all the expense. When considering the payback period, we do not consider the interest rates.

1. All costs and benefits are included.
2. All economic consequences after the payback is ignored (as it does not influence the payback).
3. Does not guarantee to provide insight on the most valuable solution / alternative.

Benefit to Cost Ratio

Comparing the ratio between the cost and benefit can be utilized to make decisions. A solution / alternative is considered economically acceptable if:

• Net value of benefits \(-\) net value of costs \(\geq 0\), the more the better.
• Net value of benefits \(\div\) net value of costs \(\geq 1\), the more the better.

This set a minimum financial viability before any more detailed and sophisticated analysis, which requires more resource and time.