Benefit-Cost Analysis - Financial And Economic Appraisal Using Spreadsheets

Cover......Page 1
Half-title......Page 3
Dedication......Page 4
Title......Page 5
Copyright......Page 6
Contents......Page 7
Figures......Page 8
Tables......Page 11
Preface......Page 13
Note to the Instructor......Page 14
Acknowledgements......Page 15
Introduction......Page 17
The Use of Spreadsheets in Social Benefit-Cost Analysis......Page 27
The Rationale for Public Projects......Page 29
The Role of the Analyst......Page 31
Exercises......Page 32
Investment Appraisal from a Personal Viewpoint......Page 34
Investment Opportunities in the Economy as a Whole......Page 37
The Algebra of Simple Net Present Value and Internal Rate of Return Calculations......Page 40
Annuities and Perpetuities......Page 46
Economic Depreciation and the Annual Cost of Capital......Page 48
Treatment of Inflation in Investment Appraisal......Page 49
Incorporating a Risk Factor in the Discount Rate......Page 50
Exercises......Page 51
Discounted Cash Flow Analysis in Practice......Page 52
Discounting and the Time Value of Money......Page 53
Using Annuity Tables......Page 55
The Net Present Value (NPV) Criterion......Page 57
The Effect of Changing the Discount Rate......Page 58
Benefit-Cost Ratio Decision-Rule......Page 59
The Internal Rate of Return (IRR) Criterion......Page 60
Interpolation......Page 61
Use of Annuity Tables......Page 62
Selecting among Mutually Exclusive Projects......Page 63
Problems with the NPV Decision Criterion......Page 65
Under Capital Rationing......Page 66
Comparing Projects with Different Lives......Page 67
Using Electronic Spreadsheets......Page 70
Exercises......Page 76
Cash flows......Page 78
Inflation and Relative Prices......Page 80
Incremental or Relative Cash Flows......Page 83
Fixed Investment......Page 85
Working Capital......Page 87
Interest Charges, Financing Flows and Cash Flow on Equity......Page 88
Calculating the Return on Total Investment, Cost of Debt Finance and Return on Equity: An Example......Page 91
Taxation and After-Tax Net Cash Flows......Page 92
The Discount Rate......Page 93
Worked Example: National Fruit Growers (NFG) Project......Page 94
Step 1: Setting up the “Key Variables” Table......Page 96
Step 2: Setting up the Project’s Cash Flow......Page 97
Step 3: Setting up the Cash Flow for the Financing of the Project......Page 98
Step 4: Calculating Taxes and After-Tax Cash Flows......Page 99
APPENDIX TO CHAPTER 4: Case Study “International Cloth Products”......Page 100
3. Investment Costs......Page 101
5. Direct Labour Force (see Table A4.2)......Page 102
9. Taxes and Incentives......Page 103
Some Solution Spreadsheet Tables for the ICP Case Study......Page 104
Exercises......Page 106
Introduction......Page 108
Examples of Shadow-Pricing......Page 112
The Treatment of Taxes in the Efficiency Benefit-Cost Analysis Pricing Rule......Page 124
Corrective Taxation......Page 127
The Discount Rate......Page 128
Worked Example: Efficiency Analysis of National Fruit Growers (NFG) Project......Page 129
Allowing for Changes in Indirect Taxes and Subsidies......Page 132
Cost of Capital Goods......Page 133
Cost of Labour......Page 134
The Efficiency Benefit-Cost Analysis......Page 135
Exercises......Page 136
How to Identify Referent Group Benefits in Practice......Page 138
Some Examples of Referent Group Net Benefits......Page 142
Further Examples......Page 148
Worked Example: Referent Group Analysis of National Fruit Growers’ (NFG) Project......Page 150
APPENDIX TO CHAPTER 6: Referent Group Net Benefits in the ICP Case Study......Page 154
Comparing Alternative Scenarios......Page 157
Exercises......Page 160
Introduction......Page 162
Real vs. Pecuniary Effects......Page 163
Consumer Surplus......Page 164
The Kaldor–Hicks Criterion......Page 165
Aggregating Consumer Surplus Measures......Page 167
Building a Bridge......Page 168
Cutting Bus Fares......Page 172
Benefits of Job Training......Page 174
Producer Benefits from an Irrigation Project......Page 177
Accounting for Input Price Changes......Page 182
Price Changes in Other Markets......Page 183
The ICP Case Study: Allowing for an Increase in the Skilled Wage......Page 185
APPENDIX TO CHAPTER 7: Compensating and Equivalent Variation......Page 187
Further Reading......Page 190
Exercises......Page 191
Traded and Non-traded Goods......Page 193
Valuing Traded and Non-traded Commodities in Benefit-Cost Analysis......Page 194
Evaluation of an Import-replacing Project in Real Terms......Page 195
Evaluation of an Import-replacing Project in Money Terms......Page 197
Summary of the Two Approaches to Valuation: Border vs. Domestic Prices......Page 199
The Equivalence of the Two Approaches......Page 200
Determinants of the Shadow-Exchange Rate......Page 203
Case Study: Shadow-Pricing Foreign Exchange in the ICP Project Evaluation......Page 207
Exercises......Page 209
Risk and Uncertainty......Page 210
Sensitivity Analysis......Page 211
Use of Discrete Probability Distributions......Page 214
Joint Probability Distributions......Page 215
Continuous Probability Distributions......Page 217
Using Risk Analysis in Decision-Making......Page 220
The Theory of Risk Averse Behaviour......Page 221
Using @RISK in Spreadsheet Applications......Page 225
Some Points to Note Using @RISK......Page 230
Additional Information......Page 231
Entering the Risk Analysis Data......Page 232
The Results of the Risk Analysis......Page 233
Exercises......Page 235
The Social Rate of Discount......Page 237
The Social Opportunity Cost of Public Funds......Page 239
The Deadweight Loss Resulting from Bond Finance......Page 241
The Deadweight Loss Resulting from a Tax Increase on Labour Income......Page 243
Option Value and the Value of Information......Page 246
Incorporating the Cost of Public Funds in the ICP Case Study......Page 248
Exercises......Page 252
Interpersonal Distribution......Page 254
Inter-sectoral Distribution......Page 255
Measuring the degree of inequality......Page 256
Changing Income Distribution......Page 258
The Use of Distributional Weights in Project Analysis: Some Illustrative Examples......Page 259
Theoretical Basis......Page 261
A Bottom-Up Approach......Page 267
Worked Example: Incorporating Distributional Effects in the NFG Project......Page 270
Incorporating Inter-temporal Distribution Considerations......Page 271
Exercises......Page 275
Introduction......Page 277
Environmental Resources as Public Goods......Page 279
Externalities and the Environment......Page 281
Total Economic Value......Page 282
Using Non-market Values in Benefit-Cost Analysis......Page 283
Methods of Non-market Valuation......Page 284
The Production Approach......Page 285
The Utility Approach......Page 289
Revealed Preference Methods......Page 292
Stated Preference Methods......Page 296
Alternative Approaches......Page 299
Another Example of Non-market Valuation – the Value of Life......Page 300
Exercises......Page 302
The Closed Economy......Page 304
The Open Economy......Page 309
Inter-Industry Analysis......Page 311
Inter-industry Analysis and the National Income Multiplier......Page 314
Inter-industry Analysis and Employment......Page 315
General Equilibrium Analysis......Page 316
Case Study: The Impact of the ICP Project on the Economy......Page 318
Exercises......Page 319
Introduction......Page 320
The Methodology......Page 321
The Conclusion......Page 322
EXECUTIVE SUMMARY......Page 323
1. INTRODUCTION......Page 324
2.1 Social Benefit-Cost Analysis......Page 325
Operating Costs Generally......Page 326
Depreciation......Page 327
3.1 Project Analysis......Page 328
3.2 Private Analysis......Page 329
3.4 Referent Group Analysis......Page 330
4. CONCLUSION......Page 331
Project Description......Page 348
Investment Costs......Page 349
The Output......Page 351
Operating Costs......Page 352
Referent Group Stakeholders......Page 353
Scenarios and Sensitivity Analysis......Page 354
Appendix 2: Discount and Annuity Tables......Page 356
Index......Page 358