1 Steven has a lot of free time and he decides to pick up a

1. Steven has a lot of free time, and he decides to pick up a new hobby. He has two options-he can take a painting classes or sign up for guitar classes. He estimates that the painting classes would cost him $70 and would provide him with a benefit of $100. In contrast, the guitar classes would cost him $120 but provide him benefits worth $160. Use cost-benefit analysis to arrive at the optimum choice for Steven.

Solution

The cost-benefit ratio is a tool that is used to choose the best alternative from purely an accounting or financial point of view. This cost benefit analysis can be done with the help of a cost benefit ratio which is given by:

Cost-benefit ratio = benefit/cost

The two options with their respective costs, benefits and ratios can be summed up as follows:

Alternative

Cost ($)

Benefit ($)

Ratio: Benefit/Cost

Painting Class

70

100

100/70 ~ 1.43

Guitar Class

120

160

160/120~1.33

Apparently it appears that since Guitar classes provide more benefit, Steven should sign up for guitar classes, but the cost-benefit analysis shows that the ratio of benefit to cost of Painting classes is higher than that of guitar classes. Therefore, Steven’s optimum choice should be Painting Classes.

Alternative	Cost ($)	Benefit ($)	Ratio: Benefit/Cost
Painting Class	70	100	100/70 ~ 1.43
Guitar Class	120	160	160/120~1.33