BACKGROUND: Despite remarkable progress in water coverage improvements, diseases associated with poor water remain a considerable public health problem in many developing countries. OBJECTIVE: We aimed to estimate the costs and benefits of drilling or rehabilitating boreholes with handpumps in resource-poor settings and hard-to-reach areas. METHODS: Diarrheal reduction in the population was predicted on the basis of the empirical findings from a cluster randomized controlled trial. The full investment and estimated annual running costs were used to calculate the intervention costs. Direct economic benefits of avoiding child diarrheal disease, indirect economic benefits related to health improvements, and non-health benefits related to water improvement were estimated. One-way and multi-way sensitivity analyses were performed to determine the robustness of the findings. RESULTS: Our analysis found that the return on a US$ 1 investment was US$ 9.4 for borehole drilling and US$ 14.1 for borehole rehabilitation. Time savings were the main contributor, accounting for 68% of the benefits, followed by the economic benefits of averted child deaths, which contributed to 15% of the benefits. The sensitivity analyses suggested that improving water sources yields high returns under all circumstances, and that borehole rehabilitation is more efficient than borehole drilling. CONCLUSION: This study explicitly justifies increased investment in water improvement in rural areas and demonstrates the high returns of rehabilitating boreholes. We hope that this study will be used as evidence for informing the policy decisions of governments or international agencies regarding further investments in improved water coverage in rural areas and the selection of appropriately designed interventions.