economic analysis concepts. 2 is the project justified ?- are benefits greater than costs? which is...
TRANSCRIPT
![Page 1: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/1.jpg)
Economic Analysis Concepts
![Page 2: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/2.jpg)
2
• Is the project justified ?- Are benefits
greater than costs?
• Which is the best investment if we have a
set of mutually exclusive alternatives?
• If funds are limited, how should different
schemes be ranked?
• When should the Application systembe
built or upgraded?
Questions & Decisions (1)
![Page 3: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/3.jpg)
3
•What standard of Development should be used?
•Are anycomplementary investments required?
Questions & Decisions (2)
![Page 4: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/4.jpg)
4
• All appraisals need a framework or model for:
a) Forecasting changes
b) Evaluating those changes
Appraisal Framework
![Page 5: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/5.jpg)
5
• Costs and benefits are measured in
terms of invested money
• Systemdevelopment and maintenance
costs are compared with estimates of the
direct primary benefits going to system
users
• Economic prices are used in constant
terms
Components of Economic Analysis (1)
![Page 6: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/6.jpg)
6
•Costs and Benefits are forecast over the planning time horizon (usually between 5 and 10 years)
•Future Benefits are valued less time cosumption
Components of Economic Analysis (2)
![Page 7: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/7.jpg)
7
The cost to the economy of development and maintenance may differ from the financial cost because of :
•Type of work •taxes
The Organizations will usually be concerned with ECONOMIC costs.
Economic and Financial Prices
![Page 8: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/8.jpg)
8
In an Economic Appraisal we use ECONOMIC (or SHADOW) prices NOT FINANCIAL prices
Adjust financial prices as follows:• Exclude all taxes and cost and subsidies• Use the planning discount rate not financial market rate• If overvalued exchange rate then value imports and
exports more highly• Use the opportunity cost of worker• Standard Conversion Factors (SE) are now widely used
for road construction costs
Use of Economic Prices
![Page 9: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/9.jpg)
9
• Management (including design and
supervision)
• Workers
• Hardware
• Materials (Others)
• Environment
Project Costs
![Page 10: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/10.jpg)
10
• Reduced operating costs (VOC)• How....
Primary Effects (1)
![Page 11: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/11.jpg)
11
• Changes in Internal output
• Changes in services
• Changes in industrial output
• Changes in consumers behavior
• Changes in Profit
Other Effects
![Page 12: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/12.jpg)
12
• Captures primary benefits
• Advantages: Simple, cost based, traffic approach dependent on predicting changes in usage
• Disadvantages: May not address critical factors during development or social access
Consumers’ Surplus Approach
![Page 13: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/13.jpg)
13
•Captures secondary benefits
•Advantages: Draws attention to changes in output (key economic activity)
•Disadvantages: No reliable way of predicting response - impact studies give widely different answers
-
•For most projects benefits are just invented !
Producers’ Surplus Approach
![Page 14: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/14.jpg)
14
IncreasedFarmgate Price
Lower Input Costs
Price & Costs per Unit of Output
Output O1 O2
P2
P1
Example Producers’ Surplus
![Page 15: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/15.jpg)
15
• Any economic analysis should be designed to give maximum usage and benefits
• But we must avoid double counting. Do not add primary and secondary benefits
• In a competitive economy the consumers’ surplus approach should be adequate
Coverage and Double Counting
![Page 16: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/16.jpg)
16
• Economic analysis involves a comparison of “With” and “Without” project cases
• An unrealistic “Without” case (i.e. with little maintenance) can give a false result
• A range of “With investment” cases should be analyzed to find the best solution
Economic Comparisons
![Page 17: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/17.jpg)
17
Development benefits arise from a combination of increased work load and reduced transport costs.
Benefits may also include :• Increased production• Increased service provision• Increased industrial activity
Development Benefits
![Page 18: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/18.jpg)
18
Economic Decision Criteria
NPV IRR3 NPV/C FYRR
Project economic validity
Mutually exclusive projects
Project timing
Project screening 1
Under budget constraint 2
Notes:
1. check for robustness to changes in key variables (sensitivity analysis)
2. with incremental analysis
![Page 19: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/19.jpg)
19
• The Net Present Value (NPV) of a project alternative relative to the without project alternative is the sum of the discounted annual net benefits.
• The Internal Rate of Return (IRR) is the discount rate at which the NPV is zero.
NPV and IRR
![Page 20: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/20.jpg)
20
1. If the NPV is positive, for the chosen discount rate, then the alternative is acceptable.
2. If the NPV is negative, for the chosen discount rate, then the alternative is unacceptable.
3. If the NPV is zero, for the chosen discount rate, then the alternative is indifferent to the without project alternative.
NPV Decision Rule
![Page 21: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/21.jpg)
21
• When comparing project-alternatives, the Net Present Value (NPV) is used to select the optimal project-alternative (alternative with highest NPV)
• The Internal Rate of Return (IRR) or the B/C ratio are not recommended to compare alternatives of a given project
Comparison of Alternatives
![Page 22: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/22.jpg)
22
• An Appraisal is carried out before an investment is made. Everything is uncertain.
• A Post evaluation may be made say 5 years after the investment. The investment is known and 5yrs of with case are known.
The without case is unknown as is the remainder of the with case.
Appraisals & Post Evaluations (1)
![Page 23: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/23.jpg)
23
• In Both Cases forecasting and evaluation models are required to come to an answer.
• Hence we can never be certain about the viability of an investment !
Appraisals & Post Evaluations (2)
![Page 24: Economic Analysis Concepts. 2 Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive](https://reader036.vdocuments.site/reader036/viewer/2022062714/56649cff5503460f949d0ec5/html5/thumbnails/24.jpg)
24
Cost Effectiveness Analysis (CEA)
• Compares the cost of interventions with its predicted impacts and it is used where the benefits cannot be measured in monetary terms, or where the measurement is difficult
• It includes provisions that (a) the objectives of the intervention are indicated and are clearly part of a ampler program of objectives (such as reduction of the poverty); and (b) the intervention represents the smaller cost alternative of obtaining the indicated objectives
• It produces effectiveness indicators, such as Total Beneficiary Population per Investment or Investment per Beneficiary Population