TheImprovement ofTropical and Subtropical Rangelands

THE ECONOMIC CONTEXT 65
The basic principle for carrying out an economic analysis is to
compare alternatives on an equivalent basis, such as a fixed output,
time frame, and constant dollar values. In the analysis, the
quantifiable assumptions must first be established as follows:
• All baseline project assumptions, such as the period of analysis,
discount rate, cost of capital, and other economic and financial
variables must be determined.
• Estimates must be made of project costs including capital
costs, one-time costs such as permits, annual operating and maintenance
costs, and provisions for renewals and replacements. Estimates
of fees, construction, labor and materials, and legal fees must all be
determined and placed within the desired schedule.
• Project benefits, principally the increased production, must
be ascertained.
• The source of financing and the specific terms of the loan
must be defined.
• An appropriate economic analysis methodology must be chosen,
and economic and financial feasibility must be established.
• A sensitivity analysis must be performed to determine how
costs and benefits react to variations in such facton as discount rate,
financing, and productivity.
• The persons or groups of persons who gain and who lose by
the introduction of the project must be identified; there are always
some losers.
The common approach to economic analyses has been to compare
costs and revenues over a consistent time period on a ratio basis or
net positive benefit basis. Several measures using discounted cash
flow techniques can be employed: internal rate ofreturn, benefit-cost
ratio, net present value, and life-cycle costs. Each technique has its
advantages, disadvantages, and appropriate applications.
Discount Rate
The discount rate is used for determining economic feasibility,
whereas the interest rate is used to ascer~ainfinancial feasibility. The
proper rate to use for testing economic feasibility is the opportunity
cost of capital to society. This ia the rate of return that could be
earned by investing the capital cost of the project in a venture of
similar risk or an alternative marginal project.