What is a common index used to calculate the benefits of a training program relative to its costs?

The benefit-cost ratio (BCR) is a ratio used in a cost-benefit analysis to summarize the overall relationship between the relative costs and benefits of a proposed project. BCR can be expressed in monetary or qualitative terms. If a project has a BCR greater than 1.0, the project is expected to deliver a positive net present value to a firm and its investors.

• The 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.
• If a project has a BCR greater than 1.0, the project is expected to deliver a positive net present value to a firm and its investors.
• If a project's BCR is less than 1.0, the project's costs outweigh the benefits, and it should not be considered.

Benefit-cost ratios (BCRs) are most often used in capital budgeting to analyze the overall value for money of undertaking a new project. However, the cost-benefit analyses for large projects can be hard to get right, because there are so many assumptions and uncertainties that are hard to quantify. This is why there is usually a wide range of potential BCR outcomes.

The BCR also does not provide any sense of how much economic value will be created, and so the BCR is usually used to get a rough idea about the viability of a project and how much the internal rate of return (IRR) exceeds the discount rate, which is the company’s weighted-average cost of capital (WACC) – the opportunity cost of that capital.

The BCR is calculated by dividing the proposed total cash benefit of a project by the proposed total cash cost of the project. Prior to dividing the numbers, the net present value of the respective cash flows over the proposed lifetime of the project – taking into account the terminal values, including salvage/remediation costs – are calculated.

If a project has a BCR that is greater than 1.0, the project is expected to deliver a positive net present value (NPV) and will have an internal rate of return (IRR) above the discount rate used in the DCF calculations. This suggests that the NPV of the project’s cash flows outweighs the NPV of the costs, and the project should be considered.

If the BCR is equal to 1.0, the ratio indicates that the NPV of expected profits equals the costs. If a project's BCR is less than 1.0, the project's costs outweigh the benefits, and it should not be considered.

As an example, assume company ABC wishes to assess the profitability of a project that involves renovating an apartment building over the next year. The company decides to lease the equipment needed for the project for $50,000 rather than purchasing it. The inflation rate is 2%, and the renovations are expected to increase the company's annual profit by $100,000 for the next three years.

The NPV of the total cost of the lease does not need to be discounted, because the initial cost of $50,000 is paid up front. The NPV of the projected benefits is $288,388, or ($100,000 / (1 + 0.02)^1) + ($100,000 / (1 + 0.02)^2) + ($100,00 / (1 + 0.02)^3). Consequently, the BCR is 5.77, or $288,388 divided by $50,000.

In this example, our company has a BCR of 5.77, which indicates that the project's estimated benefits significantly outweigh its costs. Moreover, company ABC could expect $5.77 in benefits for each $1 of costs.

The primary limitation of the BCR is that it reduces a project to a simple number when the success or failure of an investment or expansion relies on many factors and can be undermined by unforeseen events. Simply following a rule that above 1.0 means success and below 1.0 spells failure is misleading and can provide a false sense of comfort with a project. The BCR must be used as a tool in conjunction with other types of analysis to make a well-informed decision.

The BRC is used in cost-benefit analysis to describe the connection between the costs and benefits of a potential project.

The Benefit-Cost-Ratio is determined by dividing the proposed total cash benefit of a project by the proposed total cash cost of the project.

A reading over 1.0 suggests that on a broad level, a project should be financially successful; a reading of 1.0 suggests that the benefits equal the costs; and a reading below 1.0 suggests that the costs trump the benefits.

Return on investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments. ROI tries to directly measure the amount of return on a particular investment, relative to the investment’s cost.

To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment. The result is expressed as a percentage or a ratio.

• Return on Investment (ROI) is a popular profitability metric used to evaluate how well an investment has performed.
• ROI is expressed as a percentage and is calculated by dividing an investment's net profit (or loss) by its initial cost or outlay.
• ROI can be used to make apples-to-apples comparisons and rank investments in different projects or assets.
• ROI does not take into account the holding period or passage of time, and so it can miss opportunity costs of investing elsewhere.
• Whether or not something delivers a good ROI should be compared relative to other available opportunities.

The return on investment (ROI) formula is as follows:

ROI = Current Value of Investment − Cost of Investment Cost of Investment \begin{aligned} &\text{ROI} = \dfrac{\text{Current Value of Investment}-\text{Cost of Investment}}{\text{Cost of Investment}}\\ \end{aligned} ​ROI=Cost of InvestmentCurrent Value of Investment−Cost of Investment​​

"Current Value of Investment” refers to the proceeds obtained from the sale of the investment of interest. Because ROI is measured as a percentage, it can be easily compared with returns from other investments, allowing one to measure a variety of types of investments against one another.

ROI is a popular metric because of its versatility and simplicity. Essentially, ROI can be used as a rudimentary gauge of an investment’s profitability. This could be the ROI on a stock investment, the ROI a company expects on expanding a factory, or the ROI generated in a real estate transaction.

The calculation itself is not too complicated, and it is relatively easy to interpret for its wide range of applications. If an investment’s ROI is net positive, it is probably worthwhile. But if other opportunities with higher ROIs are available, these signals can help investors eliminate or select the best options. Likewise, investors should avoid negative ROIs, which imply a net loss.

For example, suppose Jo invested $1,000 in Slice Pizza Corp. in 2017 and sold the shares for a total of $1,200 one year later. To calculate the return on this investment, divide the net profits ($1,200 - $1,000 = $200) by the investment cost ($1,000), for an ROI of $200/$1,000, or 20%.

With this information, one could compare the investment in Slice Pizza with any other projects. Suppose Jo also invested $2,000 in Big-Sale Stores Inc. in 2014 and sold the shares for a total of $2,800 in 2017. The ROI on Jo’s holdings in Big-Sale would be $800/$2,000, or 40%.

Examples like Jo's (above) reveal some limitations of using ROI, particularly when comparing investments. While the ROI of Jo's second investment was twice that of the first investment, the time between Jo’s purchase and the sale was one year for the first investment but three years for the second.

Jo could adjust the ROI of the multi-year investment accordingly. Since the total ROI was 40%, to obtain the average annual ROI, Jo could divide 40% by 3 to yield 13.33% annualized. With this adjustment, it appears that although Jo’s second investment earned more profit, the first investment was actually the more efficient choice.

ROI can be used in conjunction with the rate of return (RoR), which takes into account a project’s time frame. One may also use net present value (NPV), which accounts for differences in the value of money over time, due to inflation. The application of NPV when calculating the RoR is often called the real rate of return.

Recently, certain investors and businesses have taken an interest in the development of new forms of ROIs, called "social return on investment," or SROI. SROI was initially developed in the late 1990s and takes into account broader impacts of projects using extra-financial value (i.e., social and environmental metrics not currently reflected in conventional financial accounts).

SROI helps understand the value proposition of certain environmental social and governance (ESG) criteria used in socially responsible investing (SRI) practices. For instance, a company may decide to recycle water in its factories and replace its lighting with all LED bulbs. These undertakings have an immediate cost that may negatively impact traditional ROI—however, the net benefit to society and the environment could lead to a positive SROI.

There are several other new variations of ROIs that have been developed for particular purposes. Social media statistics ROI pinpoints the effectiveness of social media campaigns—for example how many clicks or likes are generated for a unit of effort. Similarly, marketing statistics ROI tries to identify the return attributable to advertising or marketing campaigns.

So-called learning ROI relates to the amount of information learned and retained as a return on education or skills training. As the world progresses and the economy changes, several other niche forms of ROI are sure to be developed in the future.

Basically, return on investment (ROI) tells you how much money you've made (or lost) an investment or project after accounting for its cost.

Return on investment (ROI) is calculated by dividing the profit earned on an investment by the cost of that investment. For instance, an investment with a profit of $100 and a cost of $100 would have an ROI of 1, or 100% when expressed as a percentage. Although ROI is a quick and easy way to estimate the success of an investment, it has some serious limitations. For instance, ROI fails to reflect the time value of money, and it can be difficult to meaningfully compare ROIs because some investments will take longer to generate a profit than others. For this reason, professional investors tend to use other metrics, such as net present value (NPV) or the internal rate of return (IRR).

What qualifies as a “good” ROI will depend on factors such as the risk tolerance of the investor and the time required for the investment to generate a return. All else being equal, investors who are more risk-averse will likely accept lower ROIs in exchange for taking less risk. Likewise, investments that take longer to pay off will generally require a higher ROI in order to be attractive to investors.

Historically, the average ROI for the S&P 500 has been about 10% per year. Within that, though, there can be considerable variation depending on the industry. For instance, during 2020, many technology companies generated annual returns well above this 10% threshold. Meanwhile, companies in other industries, such as energy companies and utilities, generated much lower ROIs and in some cases faced losses year-over-year. Over time, it is normal for the average ROI of an industry to shift due to factors such as increased competition, technological changes, and shifts in consumer preferences.