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Financial and Economic Analysis of Projects: PDC Training Manual

Financial and economic analysis of projects is important because resources are limited and must be allocated to their best use. Project analysis assesses the benefits and costs of a project to determine which projects provide the highest benefit relative to their costs. Financial analysis examines cash flows and commercial profitability from a private perspective. Economic analysis considers overall impact on societal welfare from a national perspective, using shadow prices that account for market distortions and non-market goods.

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36 views

Financial and Economic Analysis of Projects: PDC Training Manual

Financial and economic analysis of projects is important because resources are limited and must be allocated to their best use. Project analysis assesses the benefits and costs of a project to determine which projects provide the highest benefit relative to their costs. Financial analysis examines cash flows and commercial profitability from a private perspective. Economic analysis considers overall impact on societal welfare from a national perspective, using shadow prices that account for market distortions and non-market goods.

Uploaded by

tie. mcs
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Financial and Economic Analysis of

Projects
PDC Training Manual
Outline
• Why financial and Economic Analysis ?

• What is project Analysis ?

• Financial Analysis

• Economic Analysis
Why Financial and Economic Analysis?

• All entities (firms, NGOs, governments, etc.) face the problem of allocating
limited resources to their best use:

• Firms: may be credit constrained, may be constrained in terms of forex access


• NGOs: limited by the resource they can raise
• Governments: limited by the resource they can raise through tax, borrowing.
In addition, governments are constrained by availability of land, forex, etc.

• This raises the question: How do we determine the best use of limited resources?
Why Financial and Economic Analysis?

• The best use of resources can differ based on the entity under consideration:

• Firms: Objective may be maximizing profit, improving their market share, etc.
• Governments: social welfare?

• Whatever the objective is, one must convert the desired outcome in to measures
that can be compared across potential uses.

• Project analysis is a way of accomplishing this task. i.e. it is a system of


generating outcome measures that can be compared across potential uses of
resources.
What is Project Analysis?

• Project analysis: assesses the benefits and costs of a project and reduces
them into a common yardstick.

• Projects with the highest benefit compared to cots are expected to be


implemented compared to those that are below them based on this criteria.

• The next question: How to assess benefits and costs?

• In the subsequent discussion, we assume that a project has passed through


sound technical evaluation stage
Financial Analysis

• Financial analysis is concerned with commercial or private profitability of


projects.

• In financial analysis, a project’s impact is judged based on cash flow


consideration of the project (revenue and cost) and we compare the returns
of potential projects along this line.

• Benefits and costs are calculated based on market prices that are actually
paid or received by a project
Economic Analysis
• Economic analysis is carried out from the perspective of the entire economy. It
assesses overall impact of a project on the welfare of all the citizens of the
country.

• Benefits and costs are calculated based on economic prices, also called “shadow
prices”.

• Two major sources of deviation of market (financial) prices from


economic(shadow) prices are: price distortions and nonmarketed outputs/inputs.

• Price distortions: taxes, subsidies, price control, etc.


• Non-traded outputs: public schools, externalities, etc.

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