To evaluate whether canal wall-up (CWU) tympanomastoidectomy with diffusion-weighted magnetic resonance imaging (DW-MRI) is a cost-effective method of treating cholesteatoma compared with CWU with second-look surgery. Cost-effectiveness analysis was conducted using a Markov state transition model. The simulation model adhered to the Panel Recommendations on Cost-Effectiveness in Health and Medicine established by the US Public Health Service. One-way and Monte Carlo probability sensitivity analyses were conducted for validation. Tympanomastoidectomy with DW-MRI versus tympanomastoidectomy with second-look surgery. Effectiveness and health utility were measured using quality-adjusted life years (QALYs). Costs were derived from Medicare reimbursement using the perspective of the payer. Probabilities for outcomes and complications were taken from existing literature. Cost-effectiveness was assessed using the incremental cost-effectiveness ratio. With base case analysis, the total cost was $15,069 when treated with CWU and second-look surgery versus $13,126 when treated with CWU and DW-MRI. The second-look treatment pathway yielded 17.05 QALYs, whereas the DW-MRI pathway yielded 16.91 QALYs in terms of health benefit accrued across the lifetime of the patient. The cost-effectiveness incremental cost-effectiveness ratio was $21,800/QALY. Using the conventional $50,000 willingness-to-pay threshold, second-look surgery was the more cost-effective approach 63.7% of the time by simulation. Both treatment pathways were found to be cost-effective, with second-look surgery incrementally cost-effective 63.7% of the time. Assumptions were validated by one-way and Monte Carlo probability sensitivity analysis. There is ample variation in treatment pathways regarding usage of DW-MRI and second-look surgery for cholesteatoma. To evaluate the cost-effectiveness of DW-MRI and second-look surgery approaches, accounting for health-related quality-of-life outcomes and costs for the duration of the patient lifetimes. To inform the discussion on the treatment for cholesteatoma given emergent noninvasive technologies.Level of Evidence: Level III.Indicate IRB or IACUC: Exempt.