Development Planning and

Project Analysis II

Chapter Three
Economic Analysis of Projects

By: Mulugeta Fekadu

AMU, 2023
 OUTLINE
3. Economic Analysis of Projects
3.1. An overview of Economic analysis
3.2. Identification costs and benefits of economic analysis
3.2.1. Sunk cost
3.2.2. Transfer payments, externalities and others
3.3. Determining economic values
3.3.1. Adjustment for transfer payments
3.3.2. Shadow pricing
3.3.3. Traded and Non-traded commodities
3.3.4. Valuation of Traded and Non-traded commodities
3.3.5. Border parity pricing
3.3.6. National parameters and standard conversion factor
3.4. Social cost benefit analysis
3.5. Cost effectiveness
3.5.1. Cost effectiveness measures
3.5.2. Weighted cost effectiveness measures
2
 3.1. An Overview of Economic Analysis

 Economic analysis takes a broader view of a project by considering its

impact on the economy as a whole.

 It takes into account not only the direct financial costs and benefits of
a project, but also its indirect effects on other industries, employment,
and overall economic growth.

 While financial analysis is important for determining the financial

feasibility of a project, economic analysis provides a more
comprehensive view of the project's impact on society as a whole.

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 Cont’d…
 The main objective of project economic analysis is:

• To assess financial viability of a project

• To identify economic feasibility of a project

• To evaluate economic efficiency of a project

• To assess the risk level of a project

• To determine social acceptability of a project

• To evaluate environmental effect of a project

• To provide comprehensive data for decision makers

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 Cont’d…

 An economically viable project requires that:

• First, it represents the most efficient option to achieve the outcomes;

• Second, it generates an economic surplus above its opportunity cost;

• Third, it will have sufficient funds and main institutional structure.

• Fourth, it improves the overall welfare of the society.

• Fifth, it improves productivity and environmental protection.

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 3.1.1. Questions that Economic Analysis Should
Answer
 This section provides a general overview of the questions that good
economic analysis should answer, and can serve as a checklist.
1. What is the objective of the project?
 A clear definition is essential for reducing the number of alternatives
to consider, for selecting tools of analysis & performance indicators.
2. What will happen if the project proceeds or not?
 Differences between the situation with and without the project are the
basis for assessing the incremental costs and benefits of the project.
3. Is the project the best alternative?
 Comparison of alternatives helps planners choose the best way to
accomplish their objectives.
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 Cont’d…
4. Does the project have separable components?
 If the project contains separable components, then each and every
component must be justified as if it were an independent project.
5. Who are winners and losers?
 Identifying those who will gain, those who will pay, and those who
will lose gives the analyst insight into the incentives.
6. What is the project's fiscal impact?
 Given the importance of fiscal policy for overall macroeconomic
stability, the fiscal impact of the project should always be analyzed.

7. Is the project financially sustainable?

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 Cont’d…
 To realize economic viability, knowing how the project will be
financed, and who will provide the funds and on what terms.
8. What is the project's environmental impact?
 Both negative (costs) and positive (benefits), should be taken into
account and, if possible, quantified and valued in monetary terms.
9. Techniques for assessment: Is the project worthwhile?
 The net present value is the suitable measure judging the acceptability
of projects whose benefits are measured in monetary terms.
10. Is this a risky project?
 At the very least, economic and risk analysis should identify the
factors that could create the greatest risks for the project.
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 Cont’d…
 Economic analysis is used to choose the means using the least
resources for a given output (efficient use of resources).

 All resource inputs and outputs have an opportunity cost through

which the extent and value of project items are estimated.

 Sustainability is enhanced if environmental effects are internalized,

and if financial returns provide an adequate incentive for project
related producers and consumers.

 When looking at the distribution of project effects and judging project

social acceptability, it is important to determine who benefits and who
pays the costs.
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 3.1.2. Scope of Economic Analysis
 The scope of economic analysis of a project can vary depending on
the specific project and the objectives of the analysis.
 Economic analysis typically includes the following issues:
• Identification of costs and benefits: The first step in any economic
analysis is to identify all of the potential costs and benefits of the
project. This includes both tangible and intangible costs and benefits.
• Quantification of costs and benefits: Once the costs and benefits
have been identified, they need to be quantified.
• This can be a challenging task, as many costs and benefits are difficult
to quantify.
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 Cont’d…
• Comparison of costs and benefits: Once the costs and benefits have
been quantified, they can be compared to determine the economic
value of the project.
• If the benefits of the project outweigh the costs, then the project is
considered to be economically feasible.
• Sensitivity analysis: It is a method used to identify how changes in
one or more input variables affect the output of a model.
• In project management, sensitivity analysis can be used to identify the
project's most critical tasks and the factors that are most likely to
impact the project's success.
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 Cont’d…
• The time horizon of the project: It is the period of time over which
the project is expected to be completed.
• It can vary depending on the size and complexity of the project; costs
and benefits of a project may not be evenly distributed over time.
• It is important to consider the time horizon of the project when
making a decision about whether to proceed.
• The risk of the project: There is always some risk associated with
any project.
• This risk can be due to factors such as changes in the market,
unexpected costs, or delays.
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 Cont’d…
• It is important to consider the risk of the project when making a
decision about whether to proceed (acceptable risk level).
• The social and environmental impact of the project: Economic
analysis typically focuses on the financial cost & benefits of a project.
• However, it is also important to consider the social and environmental
impact of the project.
• These impacts can be difficult to quantify, but they can be just as
important as the financial impacts.
• By considering all of these factors, decision-makers can make
informed decisions about whether to proceed with a project.
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3.2. Identification of Costs & Benefits of Economic
Analysis
 The identification of costs and benefits of economic analysis is a
critical step in the decision-making process.
 It is important to identify all of the potential costs and benefits, both
tangible and intangible, in order to make an informed decision about
whether or not to proceed with a project.
 There are a number of different methods that can be used to identify
costs and benefits. One common method is to use a cost-benefit
analysis.
 A cost-benefit analysis compares the costs of a project to the benefits
of the project.
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 Cont’d…
 If the benefits of the project outweigh the costs, then the project is
considered to be economically feasible.
 Another common method for identifying costs and benefits is to use a
net present value (NPV) analysis.
 NPV analysis calculates the present value of all of the future cash
flows associated with a project.
 If the NPV is positive, then the project is considered to be
economically feasible.
 The best method to use for identifying costs and benefits will depend
on the specific circumstances of the project.
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 Cont’d…
 However, all of the methods mentioned above can be used to provide
a quantitative assessment of the economic value of a project.
 In addition, it is also important to consider social and environmental
factors when identifying costs and benefits.
 These factors can be difficult to quantify, but they can have a
significant impact on the overall value of the project.
 By considering all of these factors, you can make an informed
decision about whether to proceed with a project.
 Here are some examples of costs and benefits that can be identified in
economic analysis:
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 Cont’d…
• Direct costs: These are the costs that are directly associated with the
project, such as the cost of materials, labor, and equipment.
• Indirect costs: These are the costs that are not directly associated
with the project, but that are still incurred as a result of the project,
such as the cost of overhead and interest.
• Tangible benefits: These are the benefits that can be easily
quantified, such as increased revenue or reduced costs.
• Intangible benefits: These are the benefits that cannot be easily
quantified, such as improved quality of life or environmental
protection.
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 Cont’d…
 It is important to note that the costs and benefits of a project may not
be evenly distributed over time.
 Some costs and benefits may occur early in the project, while others
may occur later.
 It is important to consider the timing of costs and benefits when
making a decision about whether to proceed with a project.
 The identification of costs and benefits is a complex process, but it is
an essential step in the decision-making process.
 By identifying all of the potential costs and benefits, you can make an
informed decision about whether or not to proceed with a project.
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 3.2.1. Sunk Cost
 A sunk cost is a cost that has already been incurred and cannot be
recovered. Example: Rent, Salaries, Insurance, Utilities, Marketing,
Legal fees, Consultancy fees etc.
 In project management, sunk costs are typically not considered when
making decisions about whether to continue or terminate a project.
 For both financial and economic analysis, the past is the past. What
matters are, future costs and future benefits.
 Costs incurred in the past are sunk costs that cannot be avoided.
 When analyzing a proposed project, sunk costs are ignored.

 Economic & financial analyses consider future returns to future costs.

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 Cont’d…
 This money cannot be recovered, regardless of whether the project is
continued or terminated.
 It is important to avoid the sunk cost fallacy, which is the tendency to
make decisions based on sunk costs.
 The sunk cost fallacy can lead to poor decision-making, as it can
cause people to continue projects that are no longer viable or to
terminate projects that have the potential to be successful.
• For example, if a project has already spent $100,000 and is only
halfway complete, the sunk cost is $100,000.

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 Cont’d…
 Here are some instructions for avoiding the sunk cost fallacy:

• Identify sunk costs: The first step to avoiding the sunk cost fallacy is
to identify sunk costs. Once you have identified sunk costs, you can
ignore them when making decisions about the future of a project.

• Focus on future costs: When making decisions about the future of a

project, focus on the future costs. These are the costs that will be
incurred if the project is continued or terminated.

• Consider the opportunity cost: When making decisions about the

future of a project, consider the opportunity cost of continuing or
terminating the project.
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 3.2.2. Transfer Payments, Externalities and others
 Externalities are costs or benefits that are borne by the parties directly
involved in an economic transaction to the outside society.
 Externalities are costs or benefits that are not reflected in the market
price of a good or service.
 Example: If a company builds a factory that pollutes the air, the
people who live near to factory may suffer health problems as a result.
 The company does not have to pay for these health problems, so they
are an externality.
 Transfer payments are payments that are made from one party to
another without any goods or services being exchanged.
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 Cont’d…
 Example, the government may give a tax break to a company that
creates jobs.
 This is a transfer payment, because the government is not getting
anything in return for the tax break.
 In project management, externalities and transfer payments can have a
significant impact on the costs and benefits of a project.
 If a project is expected to create pollution, the government may
require the project to install pollution control equipment.
 This will increase the cost of the project, but it will also reduce the
negative externalities.
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 Cont’d…
 Transfer payments can also affect the costs and benefits of a project.
 For example, if the government gives a tax break to a company that
creates jobs, the company will have more money to invest in the
project. This will increase the benefits of the project.
• It is important to consider externalities and transfer payments when
making decisions about projects.
• By doing so, you can make sure that the project is beneficial to society
as a whole.
• Here are some examples of how externalities and transfer payments
can affect projects:
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 Cont’d…

• A project that builds a new highway may create noise pollution for
people who live near the highway.
• The government may need to pay these people compensation for the
noise pollution.
• A project that builds a new school may increase the value of homes in
the area. The government may need to collect a tax on the increased
property values to pay for the school.
• By understanding the potential externalities and transfer payments
associated with a project, you can make better decisions about
whether to proceed with the project.
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 3.3. Determining Economic Values
 The essential elements and procedures (process) of economic analysis
 In investigating the impact of projects on the national economy it is
necessary to consider the essential elements of economic analysis and
undertake a number of procedures. The procedures include:
• Identify and eliminate transfer payments
• Extend the boundary of the project to include all linkages and
externalities
• Identify and value the effects of the project on the use and production
of traded and non traded goods.
• Identify and value the effects of the project on employment of labour.
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 Cont’d…
 Determining the economic values/costs of a project is a complex
process that involves a number of factors.
 Some of the key factors to consider include:
• The costs of the project: This includes the direct costs of materials,
labor and equipment, as well as indirect costs like overhead & interest.
• The benefits of the project: This includes both tangible benefits,
such as increased revenue or reduced costs, and intangible benefits,
such as improved quality of life or environmental protection.
• The timing of the costs and benefits: The costs and benefits of a
project may not occur evenly over time.
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• It is important to consider the timing of these costs and benefits when
making a decision about whether to proceed with the project.
• The risk of the project: There is always some risk associated with
any project.
• This risk can be due to factors such as changes in the market,
unexpected costs, or delays.
• It is important to consider the risk of the project when making a
decision about whether to proceed.
• Once you have considered all of these factors, you can use a variety of
methods to determine the economic value of the project.
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 Some of the most common methods in economic analysis include:
• Cost-benefit analysis: This method compares the costs of the project
to the benefits of the project. If the benefits of the project outweigh
the costs, then the project is considered to be economically feasible.
• Net present value (NPV): This method calculates the present value
of all of the future cash flows associated with the project. If the NPV
is positive, then the project is considered to be economically feasible.
• Internal rate of return (IRR): This method calculates the rate of
return on the project. If the IRR is greater than the cost of capital, then
the project is considered to be economically feasible.
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 The best method to use for determining the economic value of a
project will depend on the specific circumstances of the project.
 However, all of the methods mentioned above can be used to provide
a quantitative assessment of the economic value of a project.
 It is also important to consider social and environmental factors when
determining the value of a project.
 These factors can be difficult to quantify, but they can have a
significant impact on the overall value of the project.
 By considering all of these factors, you can make an informed
decision about whether to proceed with a project.
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 3.3.1. Adjustment for Transfer Payments
 Some payments in FA do not represent economic costs, but merely a
transfer of the control over resources from one group to another.

 Hence transfer payments have to be excluded from all estimates of

economic costs and benefits during the economic analysis of a project.

 Transfer payments affect the distribution of income though they don’t

affect the overall level of resources available to the economy.

 The reason why financial and economic NPV and IRR might differ
emanates from treatment of transfer payments (taxes, subsidies etc).

 Moreover, impact of the project on savings, income redistribution, and

the consideration for merit goods are factors differentiate FA & EA.
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 Cont’d…
 The fires step in adjusting financial prices to economic values is to
estimate direct transfer payment.
 Direct transfer payments are payments that represent only the transfer
of claims to real resources from one person in the society to another,
not the use of real resources.
 The most common transfer payments are taxes, direct subsidies, and
credit transactions that include (normally) loan receipts, repayments of
principals, and interest payments.
 All these entries should be taken out before the financial accounts are
adjusted to reflect economic values.
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 Cont’d…
 When adjusting for transfer payments in a project, it is important to
consider the following:
• The type of transfer payment.
• The value of the transfer payment.
• The timing of the transfer payment.
• The impact of the transfer payment on the costs and benefits of the
project.
 Once you have considered these factors, you can adjust the costs and
benefits of the project to reflect the impact of the transfer payments.

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 Cont’d…
 For example, if the government gives a tax break to a company that
creates jobs, you would adjust the costs of the project to reflect the
lost tax revenue.
 You would also adjust the benefits of the project to reflect the
increased jobs created.
 By adjusting for transfer payments, you can make sure that the costs
and benefits of a project are accurately reflected.
 This will help you make better decisions about whether to proceed
with the project.

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 Prices used in valuation of input & output
 Market prices, which form the basis for computing monetary costs
and benefits reflect social values only under perfect competition.

 In financial analysis the rule is to value inputs and outputs at actual

market prices and in economic analysis shadow prices are employed.

 Using different prices will give different economic & financial NPV,
IRR, and BCR while inputs & outputs are identical in physical terms.

 The price paid by a consumer under rationing is often significantly

less than price that would prevail in a competitive market (MP < EP).

 The official rate of foreign exchange in most of the developing

countries, which exercise close regulation over foreign exchange.
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 3.3.2. Shadow pricing
 The prices used in the valuation of inputs and outputs of a project in
economic analysis are called shadow prices.

 Shadow prices are used to reflect the true economic value of inputs
and outputs, taking into account market distortions and other factors
that may affect the market price.

 There are a number of different methods that can be used to estimate

shadow prices.

 One common method is to use the opportunity cost of the input or

output. The opportunity cost is the value of the next best alternative
use of the input or output.
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 Cont’d…
 For example, the opportunity cost of labor is the wage that could be
earned in another job.

 Another common method for estimating shadow prices is to use the

willingness-to-pay method.

 The willingness-to-pay method is based on the idea that people are

willing to pay a certain amount for a good or service based on how
much they value it.

 For example, the willingness-to-pay for a new park may be estimated

by asking people how much they would be willing to pay to have the
park built.
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 Cont’d…
 The choice of which method to use for estimating shadow prices will
depend on the specific circumstances of the project.

 However, all of the methods mentioned above can be used to provide

a more accurate assessment of the economic value of a project.

 In addition to the prices of inputs and outputs, it is also important to

consider the timing of costs & benefits conducting economic analysis.

 Costs and benefits that occur in the future are discounted to reflect the
fact that they are worth less today than they will be in the future.

 By considering all of these factors, you can make an informed

decision about whether to proceed with a project.
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 3.3.3. Traded and Non-traded commodities
 In project management, tradable and non-tradable commodities are
two types of resources that can be used to complete a project.
 Tradable commodities are those that can be bought and sold on the
open market, while non-tradable commodities are those that cannot.
 Tradable commodities include things like raw materials, equipment,
utilities and labor.
 These commodities can be bought and sold on the open market, and
their prices are determined by supply and demand.
 Non-tradable commodities include things like intellectual property,
brand equity, and relationships with customers.
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 Cont’d…
 These commodities cannot be bought or sold on the open market, and
their value is difficult to quantify.
 In project management, it is important to consider both tradable and
non-tradable commodities when planning and executing a project.
 Tradable commodities can be bought and sold to meet the needs of the
project, while non-tradable commodities must be managed carefully to
ensure that they are used effectively.
 Distinction of tradable and non-tradable items is not always clear-cut.
 For example, a company's brand equity can be considered a tradable
commodity if it is sold to another company.
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 3.3.4. Valuation of Traded and Non-traded
commodities
 The valuation of tradable and non-tradable commodities in a project is
a complex process that involves a number of factors.
 For tradable commodities, the value is determined by a market price.
 However, for non-tradable commodities, the value is more difficult to
determine and may need to be estimated using a variety of methods.
 Common methods for valuing non-tradable commodities include:
• Cost-based valuation: This method values the commodity based on
the cost of replacing it.
• Income-based valuation: This method values the commodity based
on the income it generates.
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 Cont’d…
• Market-based valuation: This method values the commodity based
on the prices of similar commodities in the market.
 The best method for valuing a non-tradable commodity will depend
on the specific circumstances of the project.
 In some cases, it may be necessary to use a combination of methods to
get a more accurate estimate of the value.
 Once the value of the tradable and non-tradable commodities has been
determined, they can be used to calculate the total cost of the project.
 This cost can then be used to make decisions about whether or not to
proceed with the project.
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 3.3.5. Border parity pricing
 Border parity pricing is a method of pricing goods and services that
takes into account the cost of transporting the goods or services across
a border.
 This method is often used in international trade, where the cost of
transportation can be significant.
 In project management, border parity pricing can be used to determine
the cost of goods and services that are imported or exported.
 This information can be used to make decisions about whether or not
to import or export goods and services, and to determine the best way
to transport them.
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 Cont’d…
 To calculate border parity pricing, you will need to know:
• The cost of the goods or services in the country of origin
• The cost of transportation to the country of destination
• The cost of tariffs and other taxes
 Once you have this information, you can calculate the border parity
price by adding the cost of the goods or services, the cost of
transportation, and the cost of tariffs and other taxes.
 Ex: You are importing a product from China. The cost of the product
in China is $100. The cost of transportation to the Ethiopia is $20. The
cost of tariffs and other taxes is $15. The border parity price = $135.
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 Cont’d…
 Border parity pricing can be a useful tool for project managers who
are working with international projects.
 By understanding the cost of goods and services that are imported or
exported, project managers can make more informed decisions about
how to manage their projects.
 Here are some of the benefits of using border parity pricing in a
project:
• It can help to ensure that the project is priced competitively.
• It can help to identify potential cost savings.
• It can help to reduce the risk of unexpected costs.
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 3.3.6. National parameters and standard
conversion factor
 National parameters and standard conversion factors are used to
calculate the economic value of a project.
 They are used to adjust the market price of goods and services to
account for factors such as taxes, subsidies, and the cost of living.
 National parameters are specific to a country and include factors such
as the economic opportunity cost of capital, the foreign exchange
premium, and the premium on non-tradable outlays.
 The economic opportunity cost of capital is the rate of return that
could be earned on an investment in the country's economy.

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 Cont’d…
 The foreign exchange premium is the difference between the market
exchange rate and the economic exchange rate.
 The economic exchange rate is the exchange rate that would prevail if
there were no taxes, subsidies, or other distortions in the market.
 The premium on non-tradable outlays is the additional cost of
producing goods and services that are not traded internationally.
 They are used to calculate the economic value of a project by
adjusting the market price of goods and services to account for factors
that would not be reflected in the market price.

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 Cont’d…
 This allows for a more accurate assessment of the project's potential
benefits and costs.
 Here are some examples of how national parameters and standard
conversion factors can be used in project management:
 A project manager may use national parameters to determine the cost
of capital for a project.
 A project manager may use standard conversion factors to adjust the
market price of goods and services to account for differences in the
cost of living between countries.

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 Cont’d…
 A project manager may use national parameters and standard
conversion factors to calculate the economic value of a project.
 By understanding national parameters and standard conversion
factors, project managers can make more informed decisions about
how to manage their projects.
 Here are some of the benefits of using national parameters and
standard conversion factors in a project:
• They can help to ensure that the project is priced competitively.
• They can help to identify potential cost savings.
• They can help to reduce the risk of unexpected costs.
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 3.4. Social Cost-Benefit Analysis
 When under taking project E & F appraisal it is assumed that income
distribution issues are beyond the concern of the project analyst.

 But in most countries governments are not only interested in

increasing efficiency but also in promoting greater equity.

 When one project is chosen rather than another the choice has
consequences for employment, output, consumption, savings, income
distribution and other things of relevance to national objectives.

 The purpose of social cost-benefit analysis is to see whether these

consequences taken together are desirable in the light of the objectives
of national planning.
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 Cont’d…
 Social appraisal of projects beyond E & F appraisal to determine a
project increase welfare once distributional impact is considered.

 In an economic analysis of a project it is assumed that a dollar

received by any individual will increase the community's welfare by
the same amount as a dollar received by any other individual.

 But an extra dollar given to a poor person will increase the person's
welfare by much more than would a dollar given to a rich person.

 A rationale is quite strong; the marginal utility of income of a person

who receives a low income is expected to be greater than the marginal
utility of income of the same person if he/ she receives a high income.
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 Cont’d…
 Once the costs and benefits have been identified, they must be
measured. This can be done using a variety of methods, such as
market prices, shadow prices, and contingent valuation.
 Once the costs and benefits have been measured, they must be
compared. This can be done using a variety of methods, such as the
net present value (NPV), the benefit-cost ratio (BCR), and the internal
rate of return (IRR).
 The SCBA can help decision-makers to weigh the costs and benefits
of different options and to choose the option that is most likely to
produce the greatest net benefit for society.
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 Difference in Financial and SCB Analysis
 SCB analysis must go deeper and ask what the meaning of profit is.

I. The price offered in the market is not a good guide to social welfare
for it includes the influence of income distribution on prices offered.

II. A project may have influences (externalities) are relevant for social
choice and provide a sufficient argument for rejecting commercial
profitability as a guide to public policy.

III. Even in the absence of externalities and consideration of income

distribution commercial profitability may be misleading because of
consumer's surplus.

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 3.5. Cost Effectiveness
 Cost-effectiveness in a project is the measure of how well a project
achieves its goals while minimizing costs.
 It is a way of comparing different projects to see which one is the
most efficient use of resources.
 There are a number of ways to measure cost-effectiveness. One
common method is to calculate the cost per unit of output.
 The most cost-effective project is the one that has the lowest cost per
unit of output or the highest benefit-cost ratio.
 Project managers can improve the cost-effectiveness of their projects
by carefully planning and managing resources.
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 Cont’d…
 They can also use cost-effectiveness analysis to compare different
options and choose the one that is most likely to be successful.
 Here are some of the benefits of cost-effectiveness in a project:
• It help to ensure projects are completed on time & within budget.
• It can help to identify and mitigate risks.
• It can help to improve the quality of project outputs.
• It can help to increase the satisfaction of stakeholders.
 By carefully planning and managing resources, project managers can
improve the chances of success and achieve their goals while
minimizing costs.
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 3.5.1. Cost Effectiveness Measures
 Cost-effectiveness measures are used to assess the efficiency of a
project in achieving its goals.
 There are a number of different cost-effectiveness measures that can
be used, depending on the specific goals of the project which include:
• Cost per unit of output: This measure calculates the cost of
producing a single unit of output.
• For example, if a project costs $100,000 to complete and produces
1,000 units of output, the cost per unit would be $100.
• Benefit-cost ratio: This measure calculates the ratio of the benefits of
a project to its costs.
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• For example, if a project produces benefits worth $200,000 and costs
$100,000, the benefit-cost ratio would be 2.
• Net present value (NPV): This measure calculates the present value
of all the future benefits and costs of a project. A positive NPV
indicates that the project is expected to be profitable.
• Internal rate of return (IRR): This measure calculates the rate of
return on a project's investment. A higher IRR indicates that the
project is expected to be more profitable.
 The cost-effectiveness measure for a particular project will depend on
the specific goals of the project and the availability of data.
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 5.5.2. Weighted Cost Effectiveness Measures
 Weighted cost-effectiveness measures are a type of cost-effectiveness
analysis that takes into account the relative importance of different
outcomes. This is done by assigning weights to each outcome, based
on its importance.
 The weighted cost-effectiveness ratio (WCR) is then calculated by
dividing the total benefits by the total costs, weighted by their
respective importance.
 The WCR is a more comprehensive measure of cost-effectiveness
than simple cost-effectiveness measures, such as the cost per unit of
output or the benefit-cost ratio.
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 This is because it takes into account the relative importance of
different outcomes. A project that produces a small number of high-
value outcomes may be more cost-effective than a project that
produces a large number of low-value outcomes.
 The WCR can help to identify the most cost-effective project, even
when different projects produce different types of outcomes.
 The WCR can be calculated using the following formula:
 WCR = (Benefit 1 * Weight 1) + (Benefit 2 * Weight 2) + ... +
(Benefit n * Weight n) / (Cost 1 * Weight 1) + (Cost 2 * Weight 2) +
... + (Cost n * Weight n)
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 The weights can be assigned by experts, stakeholders, or decision-
makers.
 The weights should reflect the relative importance of each outcome to
the project's goals.
 The WCR can be used to compare different projects or to track the
progress of a single project over time.
 It can also be used to justify the costs of a project to stakeholders.
 Some of the benefits of using weighted cost-effectiveness measures:
• They can help to identify the most efficient way to achieve a
project's goals.
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• They can help to compare different projects and choose the one
that is most likely to be successful.
• They can help to track the progress of a project and identify areas
where costs can be reduced.
• They can help to justify the costs of a project to stakeholders.
 Overall, weighted cost-effectiveness measures are a valuable tool for
project managers.
 By using these measures, project managers can improve the chances
of success and achieve their goals while minimizing costs.

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