PED guidebook main sxn rev6. FINAL.pdf - LGRC DILG 10

Strengthening Provincial/LocalPlanning and Expenditure ManagementProject Evaluationand DevelopmentRecall that the recommended indicator of “worth” is the net present value(NPV). This is because of the following advantages:a. The NPV always exists, unlike the IRR and EIRR.b. The NPV is not sensitive to project scale unlike the IRR, EIRR andBCR.c. The NPV is additive unlike the IRR, EIRR, BCR and the CER.Meanwhile, the cost-effectiveness ratio is used only when the benefits aredifficult to quantify and/or monetize. And when used, the CER is used tocompare between different technologies to produce the same good orservice.The IRR and EIRR are convenient measures because they can easily becompared against commercial interest rates and other measures offinancial profitability.Table 9YearCost of InvestmentBenefitsFinancial Prices Economic Prices Economic PricesConstructConstructWithoutIncrementalion O&M ion O&M Project With Project Benefit Benefit-Cost Discounted B-CA B C D E F G = F - E H = G - (C+D) I = [H/ ((1+r)^t)]012345678910NPVSum of all I4.4.2 Consideration for differences in economic lifeCaution must be exercised when comparing projects that have differenteconomic lives. The project with the shorter life-span can be adjusted, asif we will implement the project again in order to make it comparable.Alternatively, we can shorten the benefit stream of the project with thelonger life with the proper adjustment also done on the cost side.4.4.3 Distribution of benefitsThe project’s benefits may differ depending on the point of view. It isimportant to qualify these points of view in so far as they differ accordingRGEdillon January 200653