YARDSTICK INTERNATIONAL COLLEGE

COLLEGE OF POSTGRADUATE STUDIES DEPARTMENT of BUSINESS

ADMINSTRATION

COURSE:- PROJECT ANALYSISI AND MANAGEMENT

TITLE:- FINANCIAL AND ECONOMIC ANALYSIS OF

PROJECT
ASSIGNMENT 2

SUBMITED BY: - HANA GIRMA

IDNO .MO/3116/14A

SUBMITTED To; DR .ZEGEYE HABTEMARIAM

SUBMISSION DATE; FEB, 2023

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Financial Analysis of project
Financial analysis is the process of evaluating businesses, projects, budgets, and other finance-related
transactions to determine their performance and suitability. Typically, financial analysis is used to
analyze whether an entity is stable, solvent, liquid, or profitable enough to warrant a monetary
investment.

Key Takeaways

 If conducted internally, financial analysis can help fund managers make future business
decisions or review historical trends for past successes.
 If conducted externally, financial analysis can help investors choose the best possible
investment opportunities.
 Fundamental analysis and technical analysis are the two main types of financial analysis.
 Fundamental analysis uses ratios and financial statement data to determine the intrinsic value of
a security.
 Technical analysis assumes a security's value is already determined by its price, and it focuses
instead on trends in value over time.

Understanding Financial Analysis

Financial analysis is used to evaluate economic trends, set financial policy, build long-term plans for
business activity, and identify projects or companies for investment. This is done through the synthesis
of financial numbers and data. A financial analyst will thoroughly examine a company's financial
statements—the income statement, balance sheet, and cash flow statement. Financial analysis can be
conducted in both corporate finance and investment finance settings.

One of the most common ways to analyze financial data is to calculate ratios from the data in the
financial statements to compare against those of other companies or against the company's own
historical performance.

For example, return on assets (ROA) is a common ratio used to determine how efficient a company is at
using its assets and as a measure of profitability. This ratio could be calculated for several companies in
the same industry and compared to one another as part of a larger analysis.

2.3 Approaches in Financial analysis of a project

i) Non Discounting Method

The undiscounted measures are the naive methods of choosing among the alternative projects. The
analyst has before him four hypothetical projects, each calling for an investment in an irrigation pump.
All may be thought of as being more or lessalternatives for each other, but if there were sufficient

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funds, all could be accepted .Since, these projects are only illustrative, we will be making some highly
unrealistic assumption about irrigation in the hope of illustrating more dearly and quickl ysome points
about project analysis. Later we will try to make the analysis asrealistic as is worthwhile in practice.
For these irrigation investments, we have invented a new kind of pump: one that is completely used up
(or, perhaps to sayit more technically, has no residual value) after two to three years of operation.
We might say that in the project an;:~the water contains so much sand that thepump wears out in two to
three years.' We will assume for convenience that thereis no uncertainty about either the costs or returns
of the projects.To emphasize that what is generally called "operarion and maintenance cost" and
what is generally considered to be "production cost" must both be included in. \estimating project
worth, each has been given a separate column, For illustrativepurpose, of course, we could just as well
have combined these into one costcolumn called "operation, maintenance, and production cost". Table
9.1 givesdetails about the four alternative projects for pump irrigation.

Table: 9.1: Four Hypothetical Pu'mp Irrigation Projects

(000 of currency units)
Year Incremental test Value of Net Value
Incremental of Incremental
Production"
Production (Gross
benefit)
Capita Operation Production Gross
l item and
maintenance
Project 1
1 30000 - - 30000 - -
2 - 2000 3000 5000 20000 15000
3 - 2000 3000 5000 20000 15000
4 - - - - - -
Total 30000 4000 6000 40000 40000 30000
Project II
1 30000 - - 30000 -
2 - 2000 3000 5000 20000 15000
3 - 2000 3000 5000 20000 15000

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 4 - 2000 3000 5000 9100 4100
Total 30000 6000 9000 45000 49100 34100
Project III
1 30000 - - 30000 - 2000
2 - 2000 3000 5000 7000 14000
3 - 2000 3000 5000 19000 26000
4 - 2000 3000 5000 31000
Total 30000 6000 9000 45000 57000 42000
Project IV
1 30000 - - 30000 - -
2 - 2000 3000 5000 7000 2000
3 - 2000 3000 5000 19000 14000
4 - 6000 3000 5000 31000 26000
Total 30000 2000 9000 45000 57000 42000

a The net value of incremental production is the value of incremental production less the
operation and maintenance cost and the production cost

A) Ranking by Inspection
It is based on the size of costs and length of cash-flow stream. Suppose, if the two projects are with the
same investment and the same net value of production, but with difference in the length of the period
then the project with longer duration is preferred to the one with shorter time p~fiod. This leads to bias
in the choice obviously due to the absence of more elaborate and appropriate analysis. In some cases,
we can tell by simply looking at the investment cost and the "shape" of the stream if or the net value of
incremental production that one project should be accepted over another if we must choose. In general,
there are two such instances: (i) with the same investment, two projects produce the same net value of
incremental production for a period, but one continues to earn longer than the other (in the example of
Table 9.1, we would choose project II rather than project I): (2) in other instances ,for the same
investment, the total net value of incremental production may be the same, but one project has more of
the flow earlier in the time sequence (thus, in Table 9.1 we would choose project IV rather than project
III; we cannot tell by inspection, however, if project IV would be preferred to project 11- mqre

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elaborate analysis is necessary). In many cases, projects can indeed be 'examined and rejected on the
basis of inspection.
B) Payback Period
{\nother simple method of ranking a project is the length of time required to get back the investment on
the project. , The payback period of the project is estimated by using the straight forward formula .
P=I/E
Where, P = Payback period of the project in years, I = Investment of the project in rupees, and E
=Annual net cash revenue in rupees The preference of a particular project is based on the lesser
payback period.
Table 9.2: Calculation of Payback Period
Initial investment = Rs. 20,000

YEAR CASH FLOW IN RS

PROJECT A PROJECT B
0 -20000 -20000
1 5000 4000
2 5000 4000
3 5000 4000
4 5000 4000
5 5000 4000
6 5000 4000

Project 'A' Rs.20,000/ Rs 5000 = 4 years

Project 'B' I Rs.20,000 /'Rs.4,000 = 5 years
It is inadequate to exercise the option among the alternatives, because it fails to consider very important
points like, consistency of running, timing of the proceeds, returns after the payback period and
whether the cash-flows would be positive or negative in future.
C) Proceeds per Rupee of Outlay
This is worked out by dividing the total receipts from the total amount of investment, and a given
project is ranked based on the highest magnitude of the parameter. Investments are sometimes ranked
by the proceeds per unit of outlay, which is the total net value of incremental production divided by the

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total amount of the investment as shown in Table 9.3. By this criterion, we find that projects I and Il are
correctly ranked. But projects III and IV receive equal rank, although we know by simple inspection
that we would choose project IV because its returns are received earlier. Here, again, the criterion of
proceeds per unit of outlay fails of considers timing; money to be received in the future weights as
heavily as money in hand today.
Table 9.3: Proceeds Per unit of Outlay, Four Hypothetical Pump Irrigation Projects
(000 of currency units)

Incremental Cost Total Net Value Proceeds Per Unit Rank

Project Capital Items Of incremental of outlay
production
I 30000 30000 1.00 4
II 30000 34100 1.14 3
III 30000 42000 1.40 1
IV 30000 42000 1.40 1

D) Average rate of Return 'Outlay

This is another simple choice criterion and in this procedure, total receipts are first divided by the
project life span and the average proceeds obtained per year are divided by the initial investment on the
project. Here too, ranking is given to the projects, based on the highest magnitude of the estimate.
Another criterion for investment choice is the average animal proceeds per unit of outlay, which is
obviously related to proceeds per unit of outlay. To calculate this I measure, the total of the net value of
incremental production is first divided by the number .of years it will be realized and then this average
of the annual proceeds is divided by the original outlay for capital items. Table 9.4 illustrates the
measure. This investment criterion has a very serious flaw. By failing to take into consideration he
length of time of the benefit stream, it automatically introduces a serious bias toward short-lived
investments with high cash proceeds. We can see how this operates: Project I ranks much better than
Project II, although we know by simple inspection that Project II is the Project we would choose.
Similarly, the criterion cannot choose between Projects III and IV, altnough, again by inspection, we
'know we would prefer Project IV because it returns its benefits earlier. This criterion is misleading
because it seems to allow for time by introducing "annual" into the terminology.

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Table 9.4: Average Annual Proceed's per Unit of Outlay, Four Hypothetical Pump Irrigation Projects
(000 of currency units)
Incremental Total Net Average net Average
Project Cost Value value Of annual proceed rank
Of incremental incremental per unit of
Capital item
production production outlay
I 30000 30000 15000 0.50 1
II 30000 34100 11367 0.38 4
III 30000 42000 14000 0.47 2
IV 30000 42000 14000 0.47 2
.
The major drawback with undiscounted measures is that for the same data of the project, we get
different rankings; hence, choice process becomes useless. Rankings by these methods are inconsistent
and incompatible.

II) DISCOUNTED METHODS·OF PROJECT

The technique of discounting permits us to determine whether to accept for implementation projects
that have variously shaped time streams - that is, patterns of when costs and benefits fall during the life
of the project that differ from one another and that are of different durations. The most common means
of doing this is to subtract year-by-year the costs from the benefits to arrive at the incremental net
benefit stream - the so-called cash flow and then to discount that. This approach will give one of three
discounted cash flow measures of project worth namely the net present worth namely the internal rate
of return, or the net benefitinvestment ratio. Another discounted measure of project worth is find the
present worth of the cost and benefit streams separately and then to divide the present worth of the
benefit streams by the present worth of the cost stream to obtain the benefit-cost ratio.
A) Net Present Value(NPV)
This is simply the present worth of the cash flow stream. Sometimes, it is referred to as Net Present
Value (NPV). NPW is helpful in working out benefit-cost ratio of the project. Selection criterion of the
projects depends upon the positive value of the net present worth, when discounted at the opportunity

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cost of the capital . this could be satisfactorily done, provided there is a correct estimate of opportunity
cost of capital. NPW is an absolute measure, not relative.
NPV of the project is estimated using the following equation:
__p______ + ____p_____+ …… pn
NPV= ( l+ i)1 (1+i)2 (1+i)n
Where, P I Net cash flow in first year, Discount rate, t - Time period, and C Initial cost of the
investment.
Projects with positive NPW are given weight age in the selection compared to those with negative
present values, while zero NPV makes the investor indifferent. Table 9.6 presents the particulars of
NPV calculations for a project.

table 9.6: Estimation of NPV for Sericulture Project (Hypothetical)

Sericulture (One ha.)
Year Cost in Rs Return in Rs Net income in Discounting NPV in Rs
Rs factor at 12
per cent
1 38900 - 32900 0,8929 -34,733.81
2 9239 28475 19236 0,7972 15,334.94
3 10575 32550 21875 0.7118 15,641.81
4 11952 35610 23685 0.6355 15,034.66
5 12858 39802 26944 0.5674 15,288.03
NPV 26,565.63

B) Benefit-Cost Ratio .(B-C Ratio)

Here, we compare the present worth of costs with present worth of benefits .. Absolute value of the
benefit-cost will change based on the interest rate chosen. While ranking the projects depending upon
the B-C ratio, the most common procedure of selecting projects is, to choose the projects, having B-C
ratio of more than one, when discounted at opportunity cost of capital. Finally, the given project is
opted for implementation, among alternatives based on the highest B-C ratio. Following formula
depicts the estimation of B-C ratio. The estimation procedure of B-C ratio is given in Table 9.7.
B. C Ratio L t=l (1 +r)"
Table 9.7: Benefit-cost Ratio Calculation for Sericulture Project (One ha.) (Hypothetical)

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 Year Cost in Rs Gross Return Discounting percent worth percent worth
in Rs factor at 12 of worth of of worth of
per cent costs in Rs gross return
in Rs
1 38,900 - 0.8929 34,733.81 -
2 9,239 28,475 0.7972 7,365.33 22,700.27
3 10,575 32,550 0.7118 7,527.29 23,169.09
4 11,952 35,610 0,6355 7,595.50 22,630.16
5 J2,858 39,802 0.5674 7;295.63 22,583.65
64,517.56 91,083.17

Benefit-Cost Ratio = Present worth of Gross returns

Present worth of costs
Benefit-Cost Ratio = 91,083.17 = 1.41
64,517.56

B.C ratio =

C) Internal Rate of Return (IRR)

In the computation of Internal Rate of Return (IRR), the time value of money is accounted. The method
of working IRR provides the knowledge of actual rate of return from the different projects. Thus, IRR
is known as 'marginal efficiency of capital or yield on the investment'. It is the discount rate at which
the present values of the net cash flows are just equal to zero, i.e. NPW = zero. IRR must be found out
by trial and error with some approximation. The procedure is elucidated for the project on sericulture
(Table 9.8).

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Table 9.8: Estimation of IRR for Sericulture (One Hectare) (Hypothetical)
Year Cost in Gross Net Discount Net Discount Net
Rs income income Factor(40%) present Factor(43%) present
in Rs in Rs value in value in
Rs Rs
1 38,900 - -38,900 0.7143 -27,786.27 0.6993 -27.202.77
2 9,239 28,475 19,236 0.5102 9,81421 0.48902 9,406.4
3 10,573 32,550 21,975 0.3644 8,007.69 0.3419 7,51325
4 11,952 35,610 23,658 0.2603 6,158.17 02391 5,656.62
5 12,858 39,802 26,944 - 5,008.89 0.1672 4,505.04
52,913 0.1859 1,202.69 - -121.46

1202.69
RR = 40 +3 1,202.69 + 121.46
= 40 + 3 (0.9033)
= 40 +2.7249
= 42.7249

In the working procedure, an arbitrary discount rate is assumed and its corresponding NPW is arrived
at. The positive NPV value of the project indicates that IRR is still higher and the next assumed
arbitrary IRR value must be comparatively higher than the initial level. This process is continued until
NPV becomes negative. Then by interpolation method the exact IRR is found out using the following
formula.

Internal rate of return= Lower discount rate + Difference between the two Absolute discount rate
(present worth of the cash flow at the lower discount rates)
Absolute difference between the present worth of cash flow at the two discount rate

D) Modified Internal Rate of Return (MIRR)

What Is Modified Internal Rate of Return (MIRR)?

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 The modified internal rate of return (MIRR) assumes that positive cash flows are reinvested at the
firm's cost of capital and that the initial outlays are financed at the firm's financing cost. By
contrast, the traditional internal rate of return (IRR) assumes the cash flows from a project are
reinvested at the IRR itself. The MIRR, therefore, more accurately reflects the cost and profitability
of a project.

Conversely, it is not recommended to undertake a project if its MIRR is less than the expected return.
In addition, the MIRR is commonly employed to compare several alternative projects that are mutually
exclusive. In such a case, the project with the highest MIRR is the most attractive.

How to Calculate the Modified Internal Rate of Return

Calculating the MIRR considers three key variables: (1) the future value of positive cash flows
discounted at the reinvestment rate, (2) the present value of negative cash flows discounted at the
financing rate, and (3) the number of periods.

Mathematically, the calculation of the MIRR is expressed using the following equation:

Where:

 FVCF – the future value of positive cash flows discounted at the reinvestment rate
 PVCF – the present value of negative cash flows discounted at the financing rate
 n – the number of periods

Generally, the manual calculation of the MIRR is a tedious process that is prone to making mistakes.
Alternatively, the MIRR can be easily calculated in spreadsheet applications such as Microsoft Excel.
For example, in MS Excel, it can be calculated using the function called “=MIRR (cash flows,
financing rate, reinvestment rate).”

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  Similarities and differences between financial and Economic
analysis of a project

Financial and economic analysis have similar features. Both estimate the net benefits of a project
investment based on the difference between the with-project and the without-project situations. The
basic difference between them is that the financial analysis compares benefits and costs to the
enterprise, while the economic analysis compares the benefits and costs to the whole economy.
Financial and Economic analyses are essentially used to determine the costs incurred and the resulting
benefits from investing in a project. They both involve ascertaining the NPV or the net present value of
a project based on its estimated present and future cash flows, appropriately discounted. Both
techniques, however, differ in their implications and hence also in what is defined as a cost and a
benefit.
Financial Analysis is largely confined to individual organizations or their units. It involves a fairly
quantitative, fund-based approach that directly compares the expenses and revenues from a venture to
determine profitability and hence sustainability. Such evaluation may often employ the financial
statement of an enterprise – the balance sheet, the income statement, and the cash flow statement.
For instance, consider an oil drilling company evaluating an independent project - the setting up of a
new well. If the present value of the annual cash flows were to exceed the initial investment and other
costs such as taxes, possible interest payments, and operational expenses, the project would be looked
upon favourably. Additionally, the firm might also look at the project's effect on its financial ratios to
be certain about feasibility.
Economic Analysis, on the other hand, takes a much wider view and entails the impact of a project on
society as a whole. It considers the viewpoints of all stakeholders and how the results of a project
aligned with the broader economic and social policies as well as the international scenario. The costs in
economic analysis are a measure of the resources that society collectively invests for the fulfilment of
the project. The benefits, however, need not be just monetary and often include intangible benefits.

Economic analysis is very important as it allows organizations and their donors to compare the impact
of social intervention to the cost of implementing it. These comparisons aid in determining the most
effective resource allocation.

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Economic analysis is a type of assessment that helps answer the question "is it worth it?" in addition to
the question "does it work?" that other impact evaluations address. Economic analysis has been more
prominent in the impact measurement practices of charities and donors in recent years, as the sector has
been under increasing pressure to give estimates of what value is created for every pound invested.
In the above oil well case, for instance, the economic analysis deals with not just the profits from an
industry perspective. Instead, negative externalities such as pollution, displacement, and deforestation
are treated as costs while positive externalities such as employment generation which is considered
benefits.Determiningaquantitativemeasureofsuchfactorsremainschallenge.

Introduction
Economic Analysis
The economic analysis of projects attempts to determine whether a particular project provides an
acceptable level of economic benefits relative to economic costs. For the full economic net benefits to
occur, financial sustainability must also assured .Bank practice is guided by the Guidelines for the
Economic Analysis of Projects (1997). These guidelines outline the principles on which the economic
analysis of projects should be based. In practice, depending upon the data available and the cost of
obtaining more, it may not always be possible to quantify and value all the costs and benefits of a
particular project. Not every form of analysis will be equally applicable to every project. While
attempting as full an analysis as possible, the principles of the guidelines need to be adapted to the
circumstances of each project being analyzed. Procedures for the economic analysis of projects cover
the following steps: (i) assessing the rationale for a project, (ii) defining project objectives, (iii)
forecasting effective demand for project outputs, (iv) choosing the least-cost design for meeting
demand or the most cost-effective way of attaining the project objectives, (v) determining whether
economic benefit provide anadequate return on economic costs, (vi) assessing whether the project's net
benefits will be sustainable throughout the life of the project, (vii) analyzing the sensitivity of project
decisions and the risks associated with the project, (viii) identifying the distribution of project effects,
and (ix) enumerating the non quantifiable effects of the project that may influence project design and
the investment decision. Not all projects or project components produce benefits that can be measured
in monetary terms. In such cases, procedures for economic analysis comprise all of the above step
except (v).Economic analysis is undertaken at constant prices, mthatis, with out allowing for effects of
general inflation on costs or benefits, but incorporating projected relative price changes for key items.

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Project Rationale The main rationale for Bank operations is the failure of markets to adequately
provide what society wants. Investments or policy changes are related to the extent of externalities in
the production of public goods, the need to regulate monopoly suppliers, or the perceived level of risk
for private investors. Project proposals should be derived from sector analysis of future demand and
supply. The macroeconomic and sectoral policy environment and its effect on the project should be
assessed.
RATIONALE FOR ECONOMIC ANALYSIS

The main rationale for Bank operations is the failure of markets to adequately provide what society
wants. Investments or policy changes are related to the extent of externalities in the production of
public goods, the need to regulate mono poly suppliers ,or the perceived level of risk for private
investors. Project proposal should be derived from sector analysis of future demands and supply. The
and sectoral policy environment and its effect on the project should be assessed.

VALUATION AND SHADOW PRICE

The economic evaluation of a proposed course of action (henceforth "project") involves three distinct
operations: (a) determination of the physical characteristics of the project, (b) translation of these
physical quantities into value terms, and (c) application of a decision making criterion. This paper is
concerned with step (b). Step (a) is the most difficult and crucial in practice, and most of the serious
errors in benefit-cost analysis probably occur at this stage. Nevertheless these problems are ignored in
the present paper, and the information required for step (a) is assumed to be known. Until. now step (c)
has received the most attention from economists. The criteria that have been proposed include the
choice of that project with:
- the highest net present value,
- the highest internal rate of return,
- the lowest domestic resource cost of foreign exchange,
- the highest ratio of discounted benefits to discounted costs.
The choice of criterion is an important, but perhaps not over when mingly important, matter. It
is assumed in this paper that the net present value criterion has been adopted. The problem of valuation
is common to them all, however, and the ultimate choice of projects is typically a good deal more
sensitive to the way the valuation problem is handled than to the particular choice of investment

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criterion. The most obvious solution to the valuation problem is to value all inputs and outputs cf the
project. at their domestic market prices, and indeed this procedure is not lacking in advocates.
PRICINGIN ECONOMIC ANALYSIS OR SHADOW PRICING
A shadow price is the monetary value assigned to an abstract or intangible commodity which is not
traded in the marketplace. This often takes the form of an externality. Shadow prices are also known as
the recalculation of known market prices in order to account for the presence of distortionary market
instruments (e.g. quotas, tariffs, taxes or subsidies). Shadow Prices are the real economic prices given
to goods and services after they have been appropriately adjusted by removing distortionary market
instruments and incorporating the societal impact of the respective good or service. A shadow price is
often calculated based on a group of assumptions and estimates because it lacks reliable data, so it is
subjective and somewhat inaccurate.

SOURCE OF SHADOW PRICE

In its most common usage, a shadow price is an "artificial" price assigned to a non-priced asset or
accounting entry. Shadow pricing is frequently guided by certain assumptions about costs or value. It is
generally a subjective and inexact, or imprecise, endeavor. To make a decision regarding the
undertaking of a project or investment, businesses often perform a comparative analysis of the project
or investment cost against the projected benefits.

BASIC PRINCIPLE OF SHADOW PRICING

Much of applied welfare economics as it has developed over the past several decades involves the study
and use of shadow prices. Since (as we will argue) shadow pricing means different things to different
people, we start with a rather broad definition and spend some time talking about various alternative
meanings of the term. Shadow pricing will refer to the study and use of first-order welfare impacts
associated with changes in the levels of particular goods or groups of goods.

USE OF SHADOW PRICE

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The need for shadow prices arises as a result of “externalities” and the presence of distortionary market
instruments. An externality is defined as a cost or benefit incurred by a third party as a result of
production or consumption of a good or services. Where the external effect is not being accounted for
in the final cost-benefit analysis of its production. These inaccuracies and skewed results produce an
imperfect market mechanism which inefficiently allocates resources.

conversion factor

A conversion factor is the number or formula you need to convert a measurement in one set of units to
the same measurement in another set of units. The number is usually given as a numerical ratio or
fraction that can be used as a multiplication factor. For example, say you have a length that is measured
in feet and you wish to report on it in meters. If you know that there are 3.048 feet in a meter, then you
can use that as a conversion factor to determine what the same distance is in meters.

One foot is 12 inches long, and the conversion factor of 1 foot to inches is 12. In yards, 1 foot is equal
to 1/3 yard (conversion factor of 1 foot to yards is 1/3) so forth. The same length is 0.3048 meters, and
it is also 30.48 centimeters.

 To convert 10 feet to inches, multiply 10 times 12 (the conversion factor) = 120 inches
 To convert 10 feet to yards, multiply 10 x 1/3 = 3.3333 yards (or 3 1/3 yards)
 To convert 10 feet to meters, multiply 10 x .3048 = 3.048 meters
 To convert 10 feet to centimeters, multiply 10 x 30.48 = 304.8 centimete

UNIDO Approach
The UNIDO approach of Social Cost Benefit Analysis involves five stages: Calculation of
financial profitability of the project measured at market prices. Obtaining the net benefit of the
project at shadow (efficiency) prices. (Objective of SCBA-1) Adjustment for the impact of the
project on Savings & Investment. (Objective of SCBA-2) Adjustment for the impact of the
project on Income Distribution. (Objective of SCBA-3) Adjustment for the impact of the
project on Merit and Demerit Goods whose social values differ from their economic values.
(Objective of SCBA-4) UNIDO Approach (Contd.) Stage-1: Calculation of financial
profitability of the project  A good technical and financial analysis must be done before a
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 meaningful economic (social) evaluation can be made so as to determine financial profitability.
 Financial profitability is indicated by the Net Present Value (NPV) of the project, which is
measured by taking into account inputs (costs) and outputs (benefits) at market price. UNIDO
Approach – Stage One (Contd.)  Net Present value of a Project is calculated as: Here, V t =
Value of outputs at market price at time t C t = Value of inputs at market price at time t K =
Discount Rate T = Lifetime of the project I 0 = Initial cost at the start of the project.  The
project is viewed as financially feasible if NPV > 0.

Stage-2: Obtaining the net benefit of the project at economic (shadow) prices  The
Commercial Profitability analysis (calculated in stage - 1) would be sufficient only if the Project
is operated in perfect market. Because, only in a perfect market, market prices can reflect the
social value.  If the market is imperfect (most of the cases in reality), net benefit of the Project
is determined by assigning shadow prices to inputs and outputs.  Therefore, developing
shadow prices is very much vital. UNIDO Approach (Contd.)

UNIDO Approach – Stage Two (Contd.)  Shadow Prices reflect the real value of a resource
(input or output) to society.  Shadow Prices are also referred as economic prices, accounting
prices, economic/accounting efficiency prices etc.  Shadow Prices can be defined as the value
of the contribution to the country’s basic socio-economic objectives made by any marginal
change in the availability of commodities (0utput) or factor of production (input).  Example: A
project of power station may increase the production of electricity which contributes to one of
the socio-economic objectives of the country.

UNIDO Approach – Stage Two (Contd.) General Principles of Shadow Pricing Numeraire : 
A unit of account in which the values of inputs and outputs are to be expressed.  Numeraire is
determined at- Domestic currency (BDT) rather than border price. Present value rather than
future value. Because, “a bird in the hand is worth two in the bush.” Constant price rather than
current price.

 UNIDO Approach – Stage Two (Contd.) General Principles of Shadow Pricing (Contd.)
Tradability:  Tradability refers to whether a good or service is tradable or non-tradable; if
tradable whether is fully traded or non-traded.  A good/service is tradable in the absence of or

17
within limited trade barriers.  A tradable good/service is actually traded when- the import
(export) supply is perfectly elastic over the relevant range of volume. all additional demand
(production) must be made (consumed) by import (export) due to the full capacity in the
domestic industry (fulfillment of demand by domestic consumer).

UNIDO Approach – Stage Two (Contd.) General Principles of Shadow Pricing (Contd.) the
import (CIF) price is less or the export (FOB) price is more than the domestic cost of
production.  A good/service is non-tradable; if its import (CIF) price is greater than its
domestic cost of production, and/or its export (FOB) price is less than its domestic cost of
production.  A tradable good/service that is not actually traded is called non-traded. UNIDO
Approach – Stage Two (Contd.) General Principles of Shadow Pricing (Contd.) Sources of
Shadow Pricing:  Depending on the impact of the project on national economy, there are three
sources of shadow pricing: Impact of the project on National EconomySources of Shadow
Pricing From production of output angle From consumption of input angle Increase total
consumption in the economy Decrease consumption in the rest of the economy Consumer’s
willingness to pay Decrease production in other parts of the economy Increase production
within the economy Cost of production Decrease imports or increase exports Increase imports
or decrease exports Foreign Exchange Value (Border Price)

UNIDO Approach – Stage Two (Contd.) General Principles of Shadow Pricing (Contd.)
Taxes: If the project augments domestic production, taxes should be excluded; If the project
consumes existing fixed supply of non- traded inputs, tax should be included; For fully traded
goods, tax should be ignored. Consumer Willingness to Pay (CWP): What a consumer wants to
spend for a product or service. The difference between CWP and actual payment is called
consumer surplus.

UNIDO Approach – Stage Two (Contd.) Shadow Pricing of Resources Tradable inputs &
outputs:  For a fully traded good, the shadow price is border price translated into the domestic
currency at shadow foreign exchange. Tradability Type of Goods Shadow Prices Input Output
Traded Border Price Export decreased Export increased Value of Export (FOB) Impoant
increased Import decreased Cost of Import (CIF)

18
UNIDO Approach – Stage Two (Contd.) Shadow Pricing of Resources (contd.)  Assuming that a
project uses two indigenous equipments costing Tk. 5,00,000. These equipments can be exported at
$10,000. The shadow foreign rate of $ 1.00 is equivalent to Tk. 68. Therefore, shadow price of these
equipments (inputs) are ($10,000 × Tk.68) = Tk. 6,80,000. UNIDO Approach – Stage Two (Contd.)
Shadow Pricing of Resources (contd.) Non-Tradable Inputs & Outputs: Tradability Type of Goods
Shadow Prices Input Output Non-Traded: Production More from local producers Less by other local
producers Cost of Production Consumption Less to other local users More to local users Consumer’s
willingness to pay UNIDO Approach – Stage Two (Contd.) Shadow Pricing of Resources (contd.) 
Assuming that for a project, one-half of the required input is collected from additional domestic
production which has a domestic cost of Tk. 2,00,000 and the rest one-half is collected from diversion
from other consumers who are willing to pay Tk. 3,00,000. Therefore, the shadow price of the inputs
will be: (cost of production + consumer’s willingness to pay) = Tk. (2,00,000 + 3,00,000) = Tk.
5,00,000 UNIDO Approach – Stage Two (Contd.) Shadow Pricing of Resources (contd.)
TradabilityType of GoodsShadow Prices InputOutput Non-Traded: ProductionMore from local
producers Less by other local producers Cost of Production ConsumptionLess to other local users More
to local users Consumer’s willingness to pay UNIDO Approach – Stage Two (Contd.) Shadow Pricing
of Resources (contd.)  Assuming that a newly establishes power station having a total capacity of 100
million units of electricity, charges tariff at Tk. 1 for per unit electricity consumption. The consumers
of that particular area are willing to pay Tk. 1.20 for per unit. Therefore, the shadow price is (Tk. 1.20 ×
10 million) = Tk. 120 million, instead of Tk. 100 million.

UNIDO Approach – Stage Two (Contd.) Shadow Pricing of Resources (contd.) Externalities:
 An externality is an external effect (either beneficial or harmful) causes from a project which
is – not deliberately created by the project sponsors but is an incidental outcome. beyond the
control of the persons who are benefited or affected by it. not traded in the market place

UNIDO Approach – Stage Two (Contd.) Shadow Pricing of Resources (contd.) Example of
External Effects:  Near about 100,000 people had lost lands 5,680 acres due to the project of
Jamuna Bridge.  People may be affected by erosion and flood conditions brought about by
changes to the river which result from the construction activities of a bridge.  Environmental

19
pollution created by brick field.  A project of planting trees for commercial purpose may give
protection to the environment against the increasing global warmth.

UNIDO Approach – Stage Two (Contd.) Shadow Pricing of Resources (contd.) Shadow
Pricing of Externalities: Although valuation of external effects is difficult as they are often
intangible in nature and there is no market price, shadow pricing of externalities may be made
indirect means such as :  The harmful effect of the bridge may be measured by the consumer
willingness to pay for the output of the people which has been reduced due to the bridge.  The
cost of pollution may be estimated in terms of the loss of earnings as a result of damage to
health caused by it. UNIDO Approach – Stage Two (Contd.) Shadow Pricing of Resources
(contd.) Labor: Possible ImpactShadow Price (Social Cost) of Labor 1. Taking labor away from
other employments Willingness to pay of other users for this labor 2. Stimulating the production
of new workers the value assigned by the worker on the leisure that he has forego. the additional
consumption of food the cost of transport negative impact on savings and investments due to the
increased consumption by workers the cost of training the cost of urbanization 3. Importing
workersFlighting of foreign currency equivalent to the wages commanded by them along with a
premium on account of the foreign exchange.

UNIDO Approach – Stage Two (Contd.) Shadow Pricing of Resources (contd.) Capital: 
Investment of capital in a project causes to happen two things: i. Financial resources are
converted into physical assets ii. Financial resources are withdrawn from national pool of
savings. Thus alternative projects are foregone and there is an opportunity cost of it.  The
shadow price of physical assets is calculated in the same manner in which inputs and outputs are
calculated.  The opportunity cost of capital (shadow price of capital) depends on the source
from which the capital has generated. UNIDO Approach – Stage Two (Contd.) Shadow Pricing
of Resources (Contd.) Generation of Capital Opportunity Cost of Capital Generation from
additional savings Consumption rate of interest or social discount rate (the price must be paid to
the saver to sacrifice present consumption) Generation from the denial of capital to alternatives
projects Investment rate of interest (Investment rate of return that would be earned from those
alternative projects) UNIDO Approach – Stage Two (Contd.) Obtaining Net Benefit of the
Project at Shadow Prices  Determining the shadow price of One-Shot Costs Annual costs

20
 Annual benefits  Calculating Net-benefit of the project from social point of view by : Here, V t
= Shadow price of Benefit at time t C t = Shadow price of Operating Expenses at time t K =
Social Discount Rate T = Lifetime of the project I 0 = Initial cost at the start of the project.

 Net Present value of a Project from Social angle is calculated as: Here, V t = Shadow price of
Benefit at time t = 42 crore C t = Shadow price of Operating Expenses at time t = 6.5 crore K =
Social Discount Rate = 10% (assuming) T = Lifetime of the project = 25 years I 0 = Initial cost
at the start of the project = 84.75 crore Therefore, = {35.5 (PVAF. 10%, 25 ) – 84.75} = {35.5
X 9.0770 – 84.75} = {322.23 – 84.75} = Tk. 237.48 crore From the view point of society, the
project is generating a positive NPV of Tk. 237.48 crore. Determining Project Profitability from
the Social Angle
 UNIDO Approach (Contd.) Stage – 3: Adjustment for the impact of the project on Savings &
Investment  The purposes of this stage are to –  determine the amount of income gained or
lost because of the project by different income groups (such as project other than business,
government, workers, customers etc.)  evaluate the net impact of these gains and losses on
savings  measure the adjustment factor for savings and thus the adjusted values for savings
impact.  adjust the impact on savings to the net present value calculated in stage two.

UNIDO Approach – Stage Three (Contd.)  Measurement of Gain or Loss: A project appoints
1,000 laborers at a wage rate of Tk. 150 per day. These workers were ready to work for a daily
wage of Tk. 100. Therefore, the gain of the group of 1,000 workers from the project is {(150 -
100) × 1,000} = Tk. 50,000 per day.  Evaluation of the Net Impact on Savings: Net Savings
UNIDO Approach – Stage Three (Contd.)  Assuming that MPC, MPS, MP cap & CRI of an
economy is given: MPC = 70%, MPS = 30%, MP cap = 25% and CRI = 10% Therefore,
adjustment factor for saving is:  Adjusted value of the impact of the project on savings:
Adjusted value of saving = (Net impact on savings × AFs) = Tk. 4,75,000 × 6 = Tk. 28,50,000.
UNIDO Approach – Stage Three (Contd.) This Tk. 28,50,000 is now added to the net present
value of the project calculated in stage -2 ( Tk. 237.48 crore) Therefore, the adjusted net
present value at this stage will be Tk. ( 237.48 +.285) = Tk.237.765 crore. UNIDO Approach
(Contd.) Stage – 4: Adjustment for the impact of the project on Income Distribution 
Government considers a project as an investment for the redistribution of income in favor of

21
 economically weakens sections or economically backward regions.  This stage provides a
value on the effects of a project on income distribution between rich & poor and among regions.
 Distribution Adjustment Factor (Weight) is calculated and the impacts of the project on
income distribution have been valued by multiplying the adjustment factor with the particular
income of a group. This value will then be added to the net present value re-calculated in stage
three to produce the social net present value of the project.

UNIDO Approach – Stage Four (Contd.) Determination of Weights:  It there are only two
groups in a society, poor and rich, the determination of weight is just an iterative process
between the analysts (at the bottom) and the planners (at the top). This is called “bottom-up”
approach.  When more than two groups are involved, weights are calculated by the elasticity of
marginal utility of income. The marginal utility of income is the weight attached to an income
is: Where, w i = weight of income at c i level c i = level of income of group i b = base level of
income that has a weight of 1.00 n = elasticity of the marginal utility of income

UNIDO Approach – Stage Four (Contd.)  Assuming that the worker group gains an income
of Tk. 2,50,000 from a project, the base level of income is Tk. 50,000 which has a weight if
1.00 and elasticity of marginal utility of income is 0.20. Therefore, weight is:  So, value of the
impact of the project on income distribution to this group is: (Tk. 2,50,000 × 0.72) = Tk.
1,80,000.  Now, this value will be added to the net present value adjusted in stage three. 
Therefore, Adjusted NPV in this stage will be Tk. (237.765+ 0.018) = Tk. 237.78 crore

 UNIDO Approach (Contd.) Stage – 5: Adjustment for Merit and Demerit Goods  If there is no
difference between the economic value of inputs and outputs and the social value of those, the
UNIDO approach for project evaluation ends at stage four.  In practical, there are some goods
(merit goods), social value of which exceed the economic value (e.g. oil, creation of
employment etc.) and also there are some goods (demerits goods), social value of which is less
than their economic value (e.g., cigarette, alcohol, high-grade cosmetics etc.)  Adjustment to
the net present value of stage 4 is required if there is any difference between the social and
economic value.
 UNIDO Approach – Stage Five (Contd.)  The steps of adjustment procedure are: Estimating
the present economic value Calculating the adjustment factor Multiplying the economic value
22
 by the adjustment factor to obtain the adjusted value Adding or subtracting the adjusted value to
or from the net present value of the project as calculated in stage four.
 UNIDO Approach – Stage Five (Contd.) An alcohol factory is under construction. The present
economic value of the project is Tk. 237.78 crore (Adjusted NPV up to stage 4). The output of
the project has no social value than its cost of production. Cost of production is the 60 percent
of the economic price. Therefore, adjustment factor is: So, the adjusted value = (Tk. 237.78
crore × - 0.40) = - Tk. 95.11 crore Therefore, the net present value of the project in terms of
socially acceptable consumption is Tk.(237.78-95.11) = Tk. 142.67 crore.

L-M Approach

L-M Approach  I.M.D. Little and James A. Mirrlees have developed an approach to SCBA
which is famously known as L-M approach.  The core of this approach is that the social cost of
using a resource in developing countries differs widely from the price paid for it.  Hence, it
requires Shadow Prices to denote the real value of a resource to society. (mentioned earlier) L-
M Approach (Contd.) Features of L-M Approach L-M Numeraire is present uncommitted
social income.  L-M methods opts for savings as the yardstick of their entire approach. Present
savings is more valuable to them than present consumption since the savings can be converted
into investment for future.  L-M approach rejects the ‘consumption’ numeraire of UNIDO
approach since the authors (L & M) feel that the consumption of all level is valuable. L-M
Approach (Contd.) Features of L-M Approach (Contd.) This approach measures the cost and
benefits in terms of international or border prices. Why Border prices? Because the border
prices represent the correct social opportunity costs or benefits of using or producing a traded
goods. L-M Approach (Contd.) Social Cost-Benefit Analysis (SCBA) The resources – inputs
& outputs – of a project are classified into mainly:  Labor  Traded Goods  Non-traded
Goods Therefore, to find out the real value of these resources, we should calculate – a)Shadow
wage rate (SWR) b)Shadow price of Traded Goods c)Shadow price of Non-traded Goods L-M
Approach (Contd.) a) Shadow Wage Rate (SWR) The purpose of computing the SWR is to
determine the opportunity cost of employing an additional worker in the project. For this we
have to determine –  The value of the output foregone due to the use of a unit of labor  The
cost of additional consumption due to the transfer of labor L-M Approach (Contd.) L-M

23
 suggest the following formula for calculating the SWR: SWR = m + (c-c) + (1-1/s) (c-m) Here,
m = marginal productivity of the wage earner c-c = cost of urbanization (1-1/s) (c-m) = cost of
additional committed consumption c= additional resources devoted to consumption c =
consumption of wage earner 1 = value of uncommitted resources 1/s = value of committed
resources c-m = additional consumption of labor c (transportation system, e.g. road
construction, motor vehicles) – c (e.g. bus rent) = cost of urbanization (e.g. road construction)
L-M Approach (Contd.) b) Shadow price of Traded Goods Shadow price of traded goods is
simply its border or international price.  If a good is exported, its shadow price is its FOB
price;  If a good is imported, its shadow price is its CIF price. c) Shadow price of Non-traded
Goods  Non-traded goods are those which do not enter into international trade by their very
nature. (e.g. land, building, transportation)  Hence, no border price is observable for them.

L-M Approach (Contd.)  Ideally, Shadow price of Non-traded Good is defined in terms of
marginal social cost (MSC) and marginal social benefit (MSB).  L-M suggest that the
monetary cost of non-traded goods be broken down into – Labor SWR (Social Wage Rate)
Tradable Social Conversion Factor (SCF) Residual components SCF L-M Approach (Contd.)
Accounting Rate of Return (ARR): This is the rate used for discounting social profits.
Experience is the best guide to the choice of ARR. ARR should be such that all mutually
compatible projects with positive present social value can be undertaken. A Comparative
Illustration of UNIDO & L-M Approach COSTS: 1. Power equipment costing Tk. 300 million.
This equipment can be exported at $4.5 million. The shadow price of per dollar is Tk. 70. $ 4.5
millionTk. 315 millionOne-Shot Power Equipment L-M Approach UNIDO Approach
NatureCost Type

 2. 30,000 tones of cement produced indigenously are used in the project at a cost of Tk. 6,000.
One-third of the cement will come from additional domestic production which cost Tk. 5,000
per tone and Two-third will come from diversion from other consumers who are willing to pay
Tk.6,500 for per ton. The shadow price of per dollar is Tk. 70. A Comparative Illustration of
UNIDO & L-M Approach (contd.) 1.48 $ millionTk. 180 millionOne-ShotCement L-M
Approach UNIDO Approach NatureCost Type

24
 3. Other construction materials ( sand, bricks, steel etc.) cost 200 million. These materials
comes from additional production, production cost of which is 150 million. A Comparative
Illustration of UNIDO & L-M Approach (contd.) 4 . Two million man days of unskilled labor
for which the project committee decided to pay a daily wage of Tk. 100. The shadow price of
unskilled labor is 80 Tk. Per day. $ 2.29 millionTk. 160 millionOne-ShotUnskilled Labor L-M
Approach UNIDO Approach NatureCost Type $ 2.14 millionTk. 150 millionOne-ShotOther
Materials L-M Approach UNIDO Approach NatureCost Type
 5. Skilled labor costing Tk. 5o million. However, this cost reflects what others are willing to
pay for the skilled labor. 6. Operating & Maintenance cost of the project will be Tk. 75 million
annually. However, the operating cost should be Tk. 65 million from social view point. A
Comparative Illustration of UNIDO & L-M Approach (contd.) 0.71 $ millionTk. 50
millionOne-ShotSkilled Labor L-M Approach UNIDO Approach NatureCost Type $ 0.93
millionTk. 65 millionAnnualOperating Cost L-M Approach UNIDO Approach NatureCost
Type
 Benefits: 1.0.5 million acres of land will be irrigated. The Government will charge the water
levy at Tk. 150 for per acre. The value of additional output per acre due to the irrigation will be
Tk. 500 per acre. A Comparative Illustration of UNIDO & L-M Approach (contd.) 3.57 $
millionTk. 250 millionAnnualIrrigation L-M Approach UNIDO Approach NatureBenefit Type
 2.100 million units of electricity will be generated for domestic use. The electricity tariff will be
charged at Tk. 1 per unit. The consumers are willing to pay Tk. 1.5 for per unit of electricity.
3.Flood damages can be saved by Tk. 20 million annually. $ 2.14 millionTk. 150
millionAnnualElectricity L-M Approach UNIDO Approach NatureBenefit Type $ 0.29
millionTk. 20 millionAnnualFlood Relief L-M Approach UNIDO Approach NatureBenefit
Type
 Dissimilarities between Two Approaches UNIDO Approach Domestic currency is used as
Numeraire Consumption is the measurement base SCBA objectives are met through stage by
stage L-M Approach International Price is used as Numeraire Uncommitted Social Income is
the measurement base At one place all SCBA objectives are fulfilled
 Similarities between Two Approaches Shadow PricesCalculation of Shadow Prices to reflect
social value Discounted Cash Flow TechniquesUsage of Discounted Cash Flow Techniques
savings, investment and incomeTaking into account about the effect of a project on savings,

25
 investment and income of a society References Chandra, Prasanna, Project: Planning, Analysis,
Financing, Implementation, and Review, 6/e, Tata McGraw-Hill Publishing Co. Limited, New
Delhi, 2006. Little, I.M.D. & J. Mirrlees, Manual of Industrial Project analysis in developing
countries, Vol. II, OECD, 1968. Puttaswamaiah, K., & Venu, S., A Theoretical and Applied
Critique of Alternative Methodologies. UNIDO, Guidelines For Project Evaluation, 1981.
www.citechco.net/jmba

Shadow prices are often utilised in cost-benefit analyses by economic and financial analysts when
evaluating the merits of public policy & government projects, when externalities or distortionary
market instruments are present.[5] The utilisation of shadow prices in these types of public policy
decisions is extremely important given the societal impacts of those decisions. After incorporating
shadow prices into the analysis, the impacts resulting from the policy or project may differ from the
value obtained using market prices. This is an indication that the market has not properly priced the
costs or benefits in the first place, or the market hasn’t priced them at all. [6] By conducting analysis with
shadow prices it allows analysts to determining whether doing the project will provide greater benefits
than the costs incurred in totality. Not just the private or referent group benefits.

Although traditionally shadow prices have been used in government led research, the use of shadow
prices in the private sector is becoming increasingly more common, as companies try to evaluate the
social impacts of their decisions. As the desire for Environmental, Social and Governance (ESG)
investing has grown so has the need for companies and investors to evaluate the societal impacts of
their production and investment decisions.This trend can be seen with the commitments made by most
multinational corporations to reducing their CO2 emissions and acknowledging the impact their
business activities have on society.

 L-M Approach  I.M.D. Little and James A. Mirrlees have developed an approach to SCBA
which is famously known as L-M approach.  The core of this approach is that the social cost of

26
 using a resource in developing countries differs widely from the price paid for it.  Hence, it
requires Shadow Prices to denote the real value of a resource to society. (mentioned earlier)
 L-M Approach (Contd.) Features of L-M Approach L-M Numeraire is present uncommitted
social income.  L-M methods opts for savings as the yardstick of their entire approach. Present
savings is more valuable to them than present consumption since the savings can be converted
into investment for future.  L-M approach rejects the ‘consumption’ numeraire of UNIDO
approach since the authors (L & M) feel that the consumption of all level is valuable. L-M
Approach (Contd.) Features of L-M Approach (Contd.) This approach measures the cost and
benefits in terms of international or border prices. Why Border prices? Because the border
prices represent the correct social opportunity costs or benefits of using or producing a traded
goods.

L-M Approach (Contd.) Social Cost-Benefit Analysis (SCBA) The resources – inputs &
outputs – of a project are classified into mainly:  Labor  Traded Goods  Non-traded Goods
Therefore, to find out the real value of these resources, we should calculate – a)Shadow wage
rate (SWR) b)Shadow price of Traded Goods c)Shadow price of Non-traded Goods

L-M Approach (Contd.) a) Shadow Wage Rate (SWR) The purpose of computing the SWR is
to determine the opportunity cost of employing an additional worker in the project. For this we
have to determine –  The value of the output foregone due to the use of a unit of labor  The
cost of additional consumption due to the transfer of labor

L-M Approach (Contd.) L-M suggest the following formula for calculating the SWR: SWR =
m + (c-c) + (1-1/s) (c-m) Here, m = marginal productivity of the wage earner c-c = cost of
urbanization (1-1/s) (c-m) = cost of additional committed consumption c= additional resources
devoted to consumption c = consumption of wage earner 1 = value of uncommitted resources
1/s = value of committed resources c-m = additional consumption of labor c (transportation
system, e.g. road construction, motor vehicles) – c (e.g. bus rent) = cost of urbanization (e.g.
road construction) L-M Approach (Contd.) b) Shadow price of Traded Goods Shadow price of
traded goods is simply its border or international price.  If a good is exported, its shadow price
is its FOB price;  If a good is imported, its shadow price is its CIF price. c) Shadow price of
Non-traded Goods  Non-traded goods are those which do not enter into international trade by

27
 their very nature. (e.g. land, building, transportation)  Hence, no border price is observable for
them.

L-M Approach (Contd.)  Ideally, Shadow price of Non-traded Good is defined in terms of
marginal social cost (MSC) and marginal social benefit (MSB).  L-M suggest that the
monetary cost of non-traded goods be broken down into – Labor SWR (Social Wage Rate)
Tradable Social Conversion Factor (SCF) Residual components SCF

L-M Approach (Contd.) Accounting Rate of Return (ARR): This is the rate used for
discounting social profits. Experience is the best guide to the choice of ARR. ARR should be
such that all mutually compatible projects with positive present social value can be undertaken.

CONCLUTION

According to the economics and the economical ethics, Economy is defined as which social individuals
and societies can acquire resources to fulfill their needs. There is no single best financial analytic ratio
or calculation. Most often, analysts use a combination of data to arrive at their conclusionTherefore the
degree of market power is that the ability to influence the market depends on the types of markets, .
According to the behavior of the economy, it will depend on the demand, supply, taxes as well as the
other important factors which explained in the project by the student. And later part of the assignment
te student has explained the cost benefit analyzing methods and the factors that influence on the cost as
well as the benefit of the project or the business. Then those things are explained using the construction
industry such as types of the construction projects basic on the economic aspects. So finally we can
conclude that the economy of the project need to be analyze to have a better outcome when we are
doing a construction project. Because the economy is the key factor of gaining profit or losing money
vice versa.

References

28
  Benefit-Cost Analysis Guide (1976) Planning Branch, Treasury Board
Secretariat, Ottawa, Canada

 Bierman, Harold, Jr., and Seymour Smidt 1980. The Capital Budgeting
Decision. 5th ed. New York, Macmillan.

 Dasgupta, P. (1982). The Control of Resources, Oxford University

Press, New Delhi

 Gittinger J. Price 1976. Economic Analysis of Agricultural Projects, The

John Hopkins University Press, Baltimore, Maryland 2.12118;US.A.

 Chandra, Prasanna, Project: Planning, Analysis, Financing, Implementation, and Review, 6/e,
Tata McGraw-Hill Publishing Co. Limited, New Delhi, 2006. Little, I.M.D. & J. Mirrlees,
Manual of Industrial Project analysis in developing countries, Vol. II, OECD, 1968.
Puttaswamaiah, K., & Venu, S., A Theoretical and Applied Critique of Alternative
Methodologies. UNIDO, Guidelines For Project Evaluation, 1981. www.citechco.net/jmba
 Sen, A. K., "Interrelations Between Project, Sectoral an Aggregate
Planning," Econ. Bull. for Asia and Far East 21 (June/September
1970), 66-75.
 Sen, A. K., "Control Areas and Accounting Prices: An Approach to
Economic Evaluation," Econ. J. 82 (March 1972), 486-501

29