BACKGROUND Donepezil is a drug used for treatment in patients with Alzheimer's disease (AD). Information regarding the cost-effectiveness of this medication was previously rare in Asia. We used techniques of decision analysis and economic evaluation in conjunction with available local epidemiological and clinical data on costs of mild to moderate AD to assess the cost-effectiveness of donepezil in Taiwan. METHODS A four-state Markov model was built to simulate the disease progression of AD patients. Local transition probabilities and costs of different stages were from the studies published earlier. RESULTS Over a 5-year span, donepezil treatment for mild or moderate AD patients is predicted to result in the gain of 0.505 QALYs when comparing to usual care, while at the same time reducing the cost by US$7,691. The incremental cost was US$3,647 from the payer perspective; thus, the incremental cost-effectiveness ratio was estimated to be US$7,226 when considering only the medical expenditures. CONCLUSIONS Under some assumptions, donepezil treatment might be a cost saving strategy for mild to moderate AD patients in Taiwan from a societal perspective. It is inconclusive from the payer's part since we still lack a consensus for judging the cost-effectiveness of a new health care technology.