1. What is Cost Ratio?

Cost Ratio is a financial metric that compares the cost of an investment or project to its expected benefit. It provides a simple way to evaluate the efficiency and profitability of an expenditure by showing how much cost is incurred per unit of benefit.

2. How Does the Calculator Work?

The calculator uses the Cost Ratio formula:

Where:

• \( \text{Cost} \) — Total cost of the project or investment in dollars ($)
• \( \text{Benefit} \) — Total expected benefit or return in dollars ($)

Explanation: A lower cost ratio indicates better efficiency, as it means you're getting more benefit for each dollar spent. A ratio less than 1 indicates the benefits exceed the costs.

3. Importance of Cost Ratio Calculation

Details: Cost ratio analysis is crucial for investment decisions, project evaluation, and budget planning. It helps organizations prioritize projects, allocate resources efficiently, and maximize return on investment.

4. Using the Calculator

Tips: Enter the total cost and expected benefit in dollars. Both values must be positive numbers, with benefit greater than zero. The calculator will compute the cost ratio.

5. Frequently Asked Questions (FAQ)

Q1: What is a good cost ratio?
A: Generally, a cost ratio less than 1 is considered good as it indicates benefits exceed costs. The lower the ratio, the better the investment efficiency.

Q2: How is cost ratio different from benefit-cost ratio?
A: Cost ratio is cost divided by benefit, while benefit-cost ratio is benefit divided by cost. They are reciprocals of each other.

Q3: Can cost ratio be negative?
A: No, cost ratio cannot be negative as both cost and benefit should be positive values. A negative benefit would indicate a loss, not a benefit.

Q4: What are the limitations of cost ratio analysis?
A: It doesn't account for the time value of money, risk factors, or intangible benefits. More comprehensive analyses like NPV or IRR may be needed for complex decisions.

Q5: When should I use cost ratio analysis?
A: Cost ratio is most useful for quick comparisons of similar projects or when you need a simple efficiency metric for preliminary evaluation.