Probability Distribution for Benefit/Cost Ratio and Net Benefit

Abstract

Benefit/cost ratio and net benefit are the two most commonly used criteria for evaluating the economic merit of public development projects. Due to the existence of uncertainty in cost and benefit estimations, the benefit/cost ratio and net benefit cannot be quantified with absolute certainty. In most probabilistic benefit/cost analysis the probability distributions of the benefit/cost ratio are chosen arbitrarily. The intent of this paper is to present the results from a numerical experiment in attempting to identify the appropriateness of various commonly used probability distributions in describing the random behavior of the benefit/cost ratio and net benefit of an economic development project.