Project Management

Financial and economic analysis of investment projects

Ghent University Department Agricultural Economics

Project cycle
Objective-oriented intervention planning Logical framework

Identification

PERT Financial and economical analysis preparation

evaluation

appraisal

Implementation (monitoring)

Project selection
Production Marketing Financial Labour Administration

Difference between financial and economic analysis

Financial analysis confronts expenditures with revenues for each entity involved (money flows) Financial analysis identifies the money needed to finance a project Economic analysis focuses on community aspects and evaluates by comparing the financial value of the resources used with the extra benefits generated for the community or economy as a whole

Conceptual framework
S E C T O R
P R O G. E V A L.

Needs

External factors

Impact Results

Objective
Relevance

Input support

Output realisation
Efficiency
Effectivity

Use & sustainability

Basic principles for identification of costs and benefits

The increase of marginal income is measured under following principles:
with- and without principle Only direct effects Constant price principle Time = economic lifetime Only monetary effects Same denominator Reality principle

q 3

AFTER WITH PROJECT AFTER WITHOUT PROJECT

Start of project

2 BEFORE 1

2002

2004

2010 Time (t)

Construction of a dam against erosion

Changes in the dam against saltation

Irrigation project

Colonisation project

Classification of project impact

Direct or primary impact: direct consequence of the project implementation
Investment effects Exploitation effects

Indirect impact: result from links vertically related with the project Secondary or multiplier impact: multiplier effects of the direct and indirect benefits External impact: positive or negative consequences for externals of the project without compensation Social impact: impact on redistribution of income, employment, education,

Poject Costs
Definition:
Costs are the financial consequences related to the use of resources

Difference between:
investments (once-only) operational costs (several times) Which resources would not be used if the project was not realised

Principle of marginal costs:

Classification of operational costs

Maintenance Consumables Labour Taxes and levies Management costs Overhead costs Contingency costs (underestimations)

Examples of benefits and costs of agricultural projects

Costs Physical production inputs Labour Land Contingency allowances Taxes Financial costs Benefits Tangible benefits
Increased production Improved quality Time and location of sale Product shape, lifetime Reduced costs (transport, mechanise) Reduced losses

Intangible
New job opportunities Better health, reduced mortality National integration

Phased costs and benefits

Important to know the phased costs and benefits in time = cash flow Cash flow is the basis of:
Financial planning The balance of costs and benefits in the financial analysis Basis for the estimation of the economic costs and benefits (corrections needed) Financing with loans, participations, subsidies, advances

Amount (constant price)

Capital costs (project investments)

Recurrent costs (project operation)

10

15

20 Time (years)

returns

Cash flow 3
2

1 1 2
3 4 5 6 7

-1 -2 -3

10 Time (years)

investment

Cash flow
Difference between earnings and expenditures of operational activities, supplemented with the current of capital within the project
Earnings and expenditures Financing + expenditures of capital Total cash flow

Net present value NPV

Internal rate of return IRR

Payback criterium

Benefit/cost ratio