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on Project, Program and Portfolio Management |
| By: | Lindelauf, R. (Universiteit van Tilburg) |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ner:tilbur:urn:nbn:nl:ui:12-4960702&r=ppm |
| By: | Glenn Jenkins (Queen's University, Canada and Eastern Mediterranean University, Cyprus); Chun-Yan Kuo (Queen's University, Canada); Arnold C. Harberger (University of California, Los Angeles, USA) |
| Abstract: | An investment project usually lasts for many years, hence its appraisal requires a comparison of the costs and benefits over its entire life. For acceptance, the present value of the project's expected benefits should exceed the present value of its expected costs. Among a set of mutually exclusive projects, the one with the highest net present value (NPV) should be chosen. This criterion requires the use of a discount rate in order to be able to compare the benefits and costs that are distributed over the life of the investment. The discount rate recommended here for the calculation of the economic NPV of projects is the economic opportunity cost of capital for the country. If the economic NPV of a project is greater than zero, it is potentially worthwhile to implement the project. This implies that the project would generate more net economic benefits than the same resources would have generated if used elsewhere in the economy. On the other hand, if the NPV is less than zero, the project should be rejected on the grounds that the resources invested would have yielded a higher economic return if they had been left for the capital market to allocate them to other uses. This chapter explains how the economic opportunity cost of funds to an economy is derived and how it is used in the appraisal of an investment to calculate its economic present value. |
| Keywords: | discounting, discount rate, economic cost of capital, rate of time preference, gross of tax rate of return |
| JEL: | H43 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:qed:dpaper:201&r=ppm |
| By: | Glenn Jenkins (Queen's University, Canada and Eastern Mediterranean University, Cyprus); Chun-Yan Kuo (Queen's University, Canada); Arnold C. Harberger (University of California, Los Angeles, USA) |
| Abstract: | While the financial analysis of a project focuses on matters of interest to investors, bankers, public sector budgets, etc., an economic analysis deals with the impact of the project on the entire society. The primary difference between the economic and financial evaluation is that the former aggregates benefits and costs over all the country's residents to determine whether the project improves the level of economic welfare of the country as a whole while the latter conside'rs the project from the point of view of the well-being of a particular institution or subgroup of the population. A broad consensus exists among accountants on the principles to be used in undertaking a financial appraisal of a potential investment. There is also considerable agreement among financial analysts on the cash flow and balance sheet requirements for a public sector project to pay for itself on a cash basis. However, these accounting and financial principles are not a sufficient guide for undertaking an economic appraisal of a project. This chapter explains the relationship between the financial and the evaluations and how the economics is grounded in microeconomic theory and it applications in welfare economics. |
| Keywords: | economic evaluation, financial appraisal, net cash flow, willingness to pay, economic resource cost |
| JEL: | H43 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:qed:dpaper:2000&r=ppm |
| By: | Glenn Jenkins (Queen's University, Canada and Eastern Mediterranean University, Cyprus); Chun-Yan Kuo (Queen's University, Canada); Arnold C. Harberger (University of California, Los Angeles, USA) |
| Abstract: | In the integrated financial and economic analysis, there is a need to choose a numeraire in which all costs and benefits are expressed. The most common practice has been to express all costs and benefits in terms of domestic currency at a domestic price level. This is the natural rule to follow for the construction of the financial cash flow statement of a project that includes all the financial receipts and all the expenditures in each period throughout the duration of the project. When this numeraire is chosen to carry out the economic appraisal of the project it is necessary, however, to adjust the values of the transactions in the financial cash flow that involve internationally tradable goods because of distortions associated with the transactions of these goods and those that affect the market for foreign exchange. This chapter identifies the key distinct characteristics between tradable and non-tradable goods and provides a method for adjusting the financial values of tradable goods so that they reflect their economic values. |
| Keywords: | tradable, non-tradable, importables, exportables, imports, exports, economic costs, economic benefits. |
| JEL: | H43 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:qed:dpaper:203&r=ppm |