Cost Benefits Analysis Presentation

8/3/2019 Cost Benefits Analysis Presentation

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Cost-Benefits

Analysis ofDevelopmentProjects and Sectors


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Definition

estimates and totals up the equivalentmoney value of the benefits and costs tothe community of projects to establish

whether they are worthwhile. Theseprojects may be dams and highways orcan be training programs and health caresystems.


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Definition

Is an application of modern

economics Aim is to improve the

economic efficiency ofresource allocation

A course of action is judged acceptable if benefits outweigh costs.


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Definition

sometimes called benefitcost analysis (BCA), is asystematic process forcalculating and comparing

benefits and costs of aproject, decision orgovernment policy .


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CBA has two purposes:

1). To determine if it isa soundinvestment/decision


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2). To provide a basis forcomparing projects. It

involves comparing thetotal expected cost ofeach option against thetotal expected benefits,to see whether thebenefits outweigh thecosts, and by how much


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(B-C)>O

B-refers to benefitsC - refers to cost

Benefits minus Cost must be greater than O


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Concern narrowly with profits and losses of privateindividuals

The purpose of the financial benefit-cost analysis isto assess the financial viability of the proposedproject.

i.e., if the proposed project is financiallyattractive or not from the entitys viewpoint.


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It is performed by professionalswho prepare reports usingratios that make use of

information takenfrom financial statements andother reports. These reports areusually presented to top

management as one of theirbases in making businessdecisions.


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Definition

A systematic approach to determining the optimum use

of scarce resources, involving comparison of two or morealternatives in achieving a specific objective under thegiven assumptions and constraints.

Economic analysis takes into account the opportunitycosts ofresources employed and attempts to measure inmonetary terms the privateand socialcosts and benefits of a project tothe community or economy.


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Concern with the totaleffect of a project or

policy on society.

Evaluates thedevelopment alternatives

based on changes insocial welfare or the sumof the individuals welfare.


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A. Identify all cost and benefits

three steps in identifying all cost and benefits

1)accounting stance of the proposal shouldbe decided.


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The accounting stance determines the specific

area over which benefits and cost are to becounted and what constitutes a benefit cost.

It should be decided whether the point of view

to be adopted is global, national, regional orindividual.


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2)The base situation should be identified, that is,the with-without situation.


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For example, in determining the impact of a fixedguide way rapid transit system such as the BayArea Rapid Transit (BART) in the San Francisco Bay

Area the number of rides that would have beentaken on an expansion of the bus system should bededucted from the rides provided by BART andlikewise the additional costs of such an expandedbus system would be deducted from the costs ofBART. In other words, the alternative to the projectmust be explicitly specified and considered in theevaluation of the project.



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3) Real benefits and cost should be clearlydistinguished from transfer effects. Transfer likeinterest on loans, taxes and subsidies.



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B. Identify distribution of benefits and costs

This step identifies who gains and who loses as

a result of the proposal. This aspect is very

important when the object of the evaluation is

more than economic efficiency, as when theincome distribution in the country is very unequal.


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C. Express benefits and costs in monetary terms

In quantifying benefits in monetary measure, three

possible situations may be encountered:


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1.market prices exist(for outputs and inputs)

and they accurately present social values.

2. market prices exist but do not present socialvalues and therefore have to be adjusted

through shadow prices

3. Markets do not exist, in which case proxyvalues have to be determined.

C. Express benefits and costs in monetaryterms


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D.Discount costs and benefits

discounting adjust cost and benefits for differencesin timing.


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The choice of discount rate is a policy decision

depends on the opportunity costs of capital, thesocial rate of time preference, the requirementsof the donor lending agency, the countrys viewof the consumption-investment mix of the

private and public sectors.

D.Discount costs and benefits


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E.Apply a decision criterion

Three criteria to measure net benefits

1. Net present value(NPV)

2.Internal rate of return(IRR)

3. Benefit-cost ratio(BCR)


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Shadow prices

-adjusted prices

ex. When commodities such as water issubsidized.


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Environmental degradation causes not

only changes in productivity of natural

resources but also affects the productivity ofhuman beings.

ex. Loss of earnings, medical cost that result

from environmental damage caused by aproject.


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Opportunities ForegoneApproach

-involves carefully analyzing the withoutsituation and asking the question as to what

the best alternative use of the project sitewould be.


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Examples

Preserving an area of forest land forsafeguarding biodiversity. But what is the

value of biodiversity?


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Examples

Three sets of values compromised if the forest is not

preserved.

Consumptive use values(firewood, game meat, etc.)

The productive use values(timber, game meat, ivory,medicinal plants)

Non consumptive values(watershed protection,photosynthesis, regulation of climate, etc.)


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ReplacingApproach

- based on the premise that the costincurred in replacing productive assets

damaged by a project can be measured and

that these cost can be interpreted as an

estimate of the benefits presumed to flow

from measures taken to prevent that damage

from occurring.


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Shadow ProjectApproach

-evaluates the cost of replacing(through asupplementary project) the lost

environmental good service with a substitute.


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eg. If villagers depend on a nearby forest for

fuel wood, and consideration is being given to

restricting this use. The cost of providing thefuel wood by developing a nearby woodlot

could be examined.


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Relocation Approach

-deals with the expenditures involved inrelocating the physical facility that would be

damaged by a change in environmentalquality.


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eg. If a proposed factory would affect the

water quality of a river used for drinking

water source, the water intake could bemoved upstream of the project.


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A. The household production function methods

This approach investigates changes consumptionof commodities that are substitutes orcomplement for the environmental attribute.

The travel cost method(TCM), used widely tomeasure demand for recreation, is a prominentexample.


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A. The Household Production Function Methods

the cost of traveling to a recreation sitetogether with participation rates and visitor

attributes are used to derived a measure ofthe willingness to pay for the site itself.


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B. Hedonic PrizeAnalysis

Is used to estimate economic values forecosystem or environmental services that

directly affect market prices. It is mostcommonly applied to variations in housing

prices that reflect the value of localenvironmental attributes.


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It can be used to estimate economic benefits

or costs associated with:

environmental quality, including air pollution,

water pollution, or noise

environmental amenities, such as aestheticviews or proximity to recreational sites


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The basic premise of the hedonic pricing

method is that the price of a marketed good

is related to its characteristics, or theservices it provides. For example, the price of

a car reflects the characteristics of that cartransportation, comfort, style, luxury, fuel

economy, etc.


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Therefore, we can value the individual

characteristics of a car or other good by

looking at how the price people are willing topay for it changes when the characteristics

change. The hedonic pricing method is mostoften used to value environmental amenities

that affect the price of residential properties.


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C. Direct ElicitationApproaches(Surveys)

A third approach to demand estimation relies

on questionnaire experiments or to elicitpreferences.


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C. Direct ElicitationApproaches(Surveys)

In this approach, respondents are asked what

they would be willing to pay to have someenvironmental attribute such as cleaner

water, cleaner air, or better scenery.


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Cost Benefits Analysis Presentation