1. Benefit/Cost Ratio (BCR) =
Ba /(1+r)ª /
2. NPV =
Ba /(1+r)ª -
3. Internal Rate of Return (IRR)
is the value of r at which the PV of benefits equalsthe PV of Costs or NPV = 0 i.e.
Ba /(1+r)ª =
Economic cost-benefit analysis
In the economic cost-benefit analysis, instead of market prices, the appraisal is based onthe economic costs or the resource costs or opportunity costs of both of the factors of production and the outputs. This is done on the basis of the following two adjustments inthe financial cost-benefit analysis:(i)All costs are netted out of all indirect taxes and duties and subsidies.(ii) The scarce and surplus factors are shadow priced. In general, one attaches shadow prices to labour, energy and foreign exchange cost to take care of their either scarcityvalues or slack values. Shadow prices for scarce items (i.e. items with excess demandsuch as energy, foreign exchange and skilled labor) will have shadow prices higher than their market prices, whereas items with excess supply (for example unskilledlabour) will have shadow prices lower than their market prices.(iii) Some examples of shadow prices in India:(1)Border prices for tradable items (fob price for exportable items and CIF price for importable items)(2)0.80 for unskilled and 1.20 for skilled labor (3)Black-market rate (1.05) for foreign exchange(4)1.20 for energy and non-renewable natural resources
Social cost-benefit analysis.
Social cost benefit analysis goes further beyond the financial and economic cost-benefitanalysis, and deals with not only efficiency pricing but also takes care of distributionalequity and impact of externalities on the project.The two most prominent methodologies, which address these issues in a systematic way,are the UNIDO (1972) and Little Mirrelees (1968, 1974) book on projects appraisal.Continual discussions and debates on these two approaches have led to a vast literatureon refinements and synthesis of techniques, and more sophistication in comparison withthe conventional commercial profitability analysis.
below summarizes the basic differences in these three types of cost-benefitanalysis and
provides a numerical example for a road construction project. Itmay be particularly noted that the impact of externalities and indirect costs and benefitsare not considered under financial and economic cost-benefit analysis, but are consideredfor social cost benefit analysis. Major social and environmental costs include costs for 2