COST-BENEFIT ANALYSIS

COST-BENEFIT ANALYSIS IS AN ESTIMATE OF THE COST AND THE BENEFITS OF A POLICY AND A COMPARISON OF THE TWO. A COST-BENEFIT TEST IS THE REQUIREMENT THAT THE BENEFITS OF AN ECONOMIC POLICY EXCEED ITS COSTS.

COST-BENEFIT ANALYSIS
IT IS A COMPREHENSIVE ANALYSIS WHICH SEEKS TO EXAMINE THE TOTAL IMPACT OF THE PROJECT OBVIOUSLY, A PROJECT WHICH GIVES THE MOST FAVOURABLE COST-BENEFIT RATIO IS GIVEN THE HIGHEST PRIORITY THE COSTS & BENEFITS ASSOCIATED WITH INVESTMENT PROPOSALS ARE STUDIED SYSTEMATICALLY.

COST-BENEFIT ANALYSIS
A STUDY GROUP IS FORMED TO STUDY THE INVESTMENT PROPOSAL THE STUDY GROUP CONDUCTS IN-DEPTH INVESTIGATIONS & ARRIVES AT JUSTIFIABLE ASSUMPTIONS A CASH FLOW RELATED TO THE PROJECT / INVESTMENT IDEA IS GENERATED ON THE BASIS OF THESE ASSUMPTIONS

COST-BENEFIT ANALYSIS
THIS INVOLVES A LOT OF PROCEDURAL / ADMINISTRATIVE DECISIONS BY THE MANAGEMENT, IN ADDITION TO WELLRESEARCHED POLICY DECISIONS BY THE STUDY GROUP COST-BENEFIT ANALYSIS, HOWEVER, IS NOT EASY NOR IS IT THE LAST WORD FOR ECONOMIC POLICY / INVESTMENT DECISIONS

COST-BENEFIT ANALYSIS
PROFITABILITY INDEX (PI) OR THE BENEFIT-COST RATIO (B/C RATIO), WHICH IS ONE OF THE TIME-ADJUSTED CAPITAL BUDGETING TECHNIQUE, IS THEREFORE USED TO MAKE THE ANALYSIS MORE REALISTIC IT CAN BE DEFINED AS THE RATIO WHICH IS OBTAINED DIVIDING THE PRESENT VALUE OF FUTURE CASH FLOWS BY THE PRESENT VALUE OF CASH OUTLAYS.

COST-BENEFIT ANALYSIS
SYMBOLICALLY, THE PROFITABILITY INDEX (PI) CAN BE EXPRESSED AS:
PRESENT VALUE OF CASH INFLOWS

PI=-------------------------------------------PRESENT VALUE OF CASH OUTFLOW

COST-BENEFIT ANALYSIS
# APPOINT A STUDY GROUP TO STUDY COSTS/BENEFITS # EXAMINE BASIC FEASIBILITY

IDENTIFY CRITICAL SUCCESS FACTORS

# CRITICALLY ASSESS:

TECHNOLOGY SUITABILITY MARKET CONDITIONS / CHARACTERISTICS INTERNAL STRENGTH FOR CARRYING OUT / RUNNING THE PROJECT

COST-BENEFIT ANALYSIS
REPERCUSSIONS ON: EXISTING PRODUCTS EXISTING ACTIVITIES FINANCIALS PUBLIC IMAGE STRATEGIC INTENT/FIT

COST-BENEFIT ANALYSIS
RISK INVOLVED & SOURCES OF RISK FORMING ASSUMPTIONS FOR GENERATING FINANCIAL NUMBERS FORMING ASSUMPTIONS FOR NONFINANCIAL COSTS & BENEFITS.

COST-BENEFIT ANALYSIS
THE PRINCIPLE OF COST-BENEFIT ANALYSIS IS FURTHER APPLIED TO ASSESS THE SOCIAL IMPACT/ASPECTS & IS KNOWN AS THE SOCIAL COSTBENEFIT ANALYSIS ( SCBA).

SCBA
THERE IS NEED FOR SCBA AS: MARKET PRICES USED TO MEASURE COSTS & BENEFITS IN PROJECT ANALYSIS DO NOT REPRESENT SOCIAL VALUES DUE TO IMPERECTIONS IN THE MARKET

SCBA
MONETARY COST-BENEFIT ANALYSIS FAILS TO CONSIDER THE EXTERNALITIES OR EXTERNAL EFFECTS OF A PROJECT (THE EXTERNAL EFFECTS COULD BE POSITIVE LIKE DEVELOPMENT OF INFRASTRUCTURE OR NEGATIVE LIKE POLLUTION & ENVIRONMENTAL IMBALANCES)

SCBA
TAXES & SUBSIDIES ARE MONETARY COSTS & GAINS, BUT THESE ARE ONLY TRANSFER PAYMENTS FROM SOCIAL POINT OF VIEW & THEREFORE IRRELEVANT THE SCBA IS ESSENTIAL FOR MEASURING THE REDISTRIBUTION EFFECTS OF A PROJECT AS BENEFITS GOING TO POORER SECTIONS ARE MORE IMPORTANT THAN ONE GOING TO SECTIONS WHICH ARE ECONOMICALLY BETTER OFF

SCBA
PROJECTS MANUFACTURING LIQUOR OR CIGARRETTES ARE NOT DISTINGUISHED FROM THOSE GENERATING ELECTRICITY OR PRODUCING NECESSITIES OF LIFE. THUS MERIT WANTS ARE IMPORTANT APPRAISAL CRITERION FOR SCBA.

INDICATORS OF SOCIAL DESIRABILITY

EMPLOYMENT POTENTIAL CRITERION CAPITAL OUTPUT RATIO VALUE ADDED PER UNIT OF CAPITAL FOREIGN EXCHANGE BENEFIT CRITERION COST-BENEFIT RATIO CRITERION

UNIDO
CALCULATION OF FINANCIAL PROFITABILITY OF THE PROJECT MEASURED IN TERMS OF MARKET PRICES

CALCULATION OF THE NET BENEFIT OF PROJECT IN TERMS OF ECONOMY OR EFFICIENCY PRICES

ADJUSTMENT FOR THE IMPACT OF THE PROJECT ON SAVINGS & INVESTMENT

UNIDO APPROACH
ADJUSTMENT FOR THE IMPACT OF THE PROJECT ON INCOME DISTRIBUTION ADJUSTMENT FOR THE IMPACT OF THE PROJECT ON MERIT GOODS & DEMERIT GOODS WHOSE SOCIAL VALUES DIFFER FROM THEIR ECONOMIC VALUES