Cost-Benefit Analyzer
Should you make the investment? Lay out the costs and benefits period by period, pick a discount rate, and see the net present value, benefit-cost ratio, and payback at a glance.
Present-value analysis
How the analysis works
Each period’s benefit and cost is discounted back to today using the rate you set: an amount in period t is divided by (1 + r) raised to the power t, so period 0 (now) is untouched and later periods count for progressively less. Adding up the discounted benefits and costs gives the present value of each, and their difference is the net present value.
The benefit-cost ratio — present value of benefits divided by present value of costs — is a quick test of efficiency: above 1.0 and the benefits outweigh the costs. The payback period tells you how long before you’re in the black on an undiscounted basis. Read all three together: NPV for the size of the win, the ratio for efficiency, and payback for how long your money is exposed.
Frequently Asked Questions
Why discount future costs and benefits?
A dollar next year is worth less than a dollar today — you could invest today's dollar, and the future is uncertain. Discounting shrinks each future amount by 1/(1+r) for every period it's away, so a benefit five years out counts for less than the same benefit next year. Without discounting, a long-dated project can look far better than it really is.
What is net present value (NPV)?
NPV is the present value of all the benefits minus the present value of all the costs, once everything is discounted back to today. A positive NPV means the decision adds value at your chosen discount rate; a negative NPV means it destroys value. When comparing options, the higher NPV usually wins.
What discount rate should I use?
Use the return you could earn on the next-best use of the money, or your cost of capital. For personal decisions, a few percent above inflation is a reasonable starting point. The rate matters: try a low and a high figure to see how sensitive your conclusion is, because a marginal project can flip from worthwhile to not as the rate rises.
What does the payback period tell me?
The payback period is how many periods it takes for the cumulative, undiscounted benefits to cover the costs. It's a rough measure of how long your money is at risk — useful as a sanity check, but blind to everything that happens after payback and to the time value of money, so never rely on it alone.
A decision aid, not financial advice. Results depend on the figures and discount rate you enter; for decisions with significant money at stake, confirm the analysis with a qualified professional.