Consider two alternative investments:

Z1 – initial outlay of $5000 and a return of $7500 Z2 – initial outlay of $20000 and a return of $24000 This gives:

For Z1: B/C = 1.5 For Z2: B/C = 1.2 This suggests that Z1 may be the better choice using the benefit:cost ratio measure.

(As an aside, looking at the difference between returns and outlays:

For Z1: B – C = $2500 For Z2: B – C = $4000 This suggests that Z2 may be the better choice looking at net returns.)

Looking at differences in benefits and costs for both investments, is it appropriate to calculate the incremental benefit:cost ratio as Z2 – Z1,

= −

− = = Benefit difference Cost difference 24 000 7500 20000 5000 16500 15000 1.1 or as Z1 – Z2,

= −

− = −

− = Benefit difference Cost difference 7500 24000 5000 20000 16500 15000 1.1 In the first case, the incremental benefit:cost ratio is greater than 1.0, and so it could be argued that it is worth investing in Z2. Or is this logic incorrect?

In the second case, the incremental benefit:cost ratio is greater than