Question

The Benefit-Cost ratio gives green signal to investors if it is:

• A. equal to one
• B. greater than one
• C. equal to or greater than one
• D. less than one

Hint:

Exam Tip:
BCR \(>\) 1: Accept the project.
BCR = 1: Indifferent (break-even).
BCR \(<\) 1: Reject the project.
BCR is a relative measure, unlike NPV which is an absolute measure.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
This question tests knowledge of investment appraisal, specifically the Benefit-Cost Ratio (BCR).

Step 2: Defining Benefit-Cost Ratio (BCR):
The Benefit-Cost Ratio is a financial metric used to evaluate the profitability of an investment or project.
\[ \text{BCR} = \frac{\text{Present Value of Benefits}}{\text{Present Value of Costs}} \]

Step 3: Decision Rule for BCR:
The decision rule for the Benefit-Cost Ratio is:
• BCR \(>\) 1: The present value of benefits exceeds the present value of costs. The project is considered profitable and viable. It gives a "green signal" to investors.
• BCR = 1: The present value of benefits equals the present value of costs. The project is break-even. It is neither profitable nor loss-making.
• BCR \(<\) 1: The present value of benefits is less than the present value of costs. The project is not profitable and should be rejected.

Step 4: Final Answer:
The Benefit-Cost ratio gives a green signal to investors if it is greater than one. Therefore, option (B) is correct.