Objective: To determine the toxicity reduction required to justify the added costs of MRI-guided radiotherapy (MR-IGRT) over CT-based image guided radiotherapy (CT-IGRT) for the treatment of localized prostate cancer. Methods: The costs of delivering prostate cancer radiotherapy with MR-IGRT and CT-IGRT in conventional 39 fractions and stereotactic body radiotherapy (SBRT) 5 fractions schedules were determined using literature values and cost accounting from two institutions. Gastrointestinal and genitourinary toxicity rates associated with CT-IGRT were summarized from 20 studies. Toxicity-related costs and utilities were obtained from literature values and cost databases. Markov modeling was used to determine the savings per patient for every 1% relative reduction in acute and chronic toxicities by MR-IGRT over 15 years. The costs and quality adjusted life years (QALYs) saved with toxicity reduction were juxtaposed with the cost increase of MR-IGRT to determine toxicity reduction thresholds for cost-effectiveness. One way sensitivity analyses were performed. Standard $100,000 and $50,000 per QALY ratios were used. Results: The added cost of MR-IGRT was $1,459 per course of SBRT and $10,129 per course of conventionally fractionated radiotherapy. Relative toxicity reductions of 7 and 14% are required for SBRT to be cost-effective using $100,000 and $50,000 per QALY, respectively. Conventional radiotherapy requires relative toxicity reductions of 50 and 94% to be cost-effective. Conclusion: From a healthcare perspective, MR-IGRT can reasonably be expected to be cost-effective. Hypofractionated schedules, such a five fraction SBRT, are most likely to be cost-effective as they require only slight reductions in toxicity (7–14%). Advances in knowledge: This is the first detailed economic assessment of MR-IGRT, and it suggests that MR-IGRT can be cost-effective for prostate cancer treatment through toxicity reduction alone.