Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

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Financial investment costs have been adjusted for fiscal components. Personnel costs have been adjustedby deducting national insurance contributions and income taxation. The conversion factor is equal to 0.74because the reservation wage has been taken into consideration for this area given its high unemployment.Specific conversion factors, calculated as a weighted average of the single component conversion factors,have been applied to investments and maintenance costs as well as to tolling and residual value (see thefollowing Table).Table 4.19 Conversion factors for each type of costType of cost CF NotesLabour 0.747 Shadow wage for not-competitive labour marketRaw Materials 1.000 Traded good: Standard Conversion FactorCarriage 0.777 44% Labour, 19.4% Diesel Oil, 36.6% OtherWorks 0.867 35% Labour, 45% Raw materials, 20% CarriageEquipments 0.918 20% Labour, 66% Raw materials, 14% CarriageMaintenance 0.835 58% Labour, 33.9% Raw materials, 7.7% CarriageThe economic performance indicators of the two options are summarised in the following Table anddetailed flows of costs and benefits are reported on (see Tables 4.21 and 4.22). The reference socialdiscount rate is 5.5%. The results show that both investment packages are economically viable. As shownbelow, Option 2 gives the best results in terms of NPV while Option 1 shows a marginally higher ERR.Option 1, the upgrading of the existing line, shows a lower Net Present Value than Option 2. Thedifference in net present benefits between the two options is much higher then the difference ininvestment costs. The volume of traffic attracted by the fully upgraded railway more than justifies thehigher investment costs. This result will be further enhanced in the medium term by the charging policiesfor road freight transport that are likely to be implemented in the forthcoming years and that will supportthe modal shift from road to rail with respect to freight traffic.Option 1 Option 2- ENPV (Millions of Euros) 938.1 1,953.3- ERR (%) 15.1 14.9- B/C Ratio 2.5 2.44.2.5 Scenario analysisThe results of the economic analysis are subject to uncertainty given the preliminary definition of someinvestments; the variability of expected traffic and the limited knowledge of unit costs. In this case, trafficprojections are particularly important as the main objective of the project is to increase the share of railtransport along the corridor and optimise the use of the existing capacity so as to reduce the negativeexternalities of the road transport. Therefore, to assess the robustness of the analysis, a pessimisticscenario analysis has been carried out on both alternatives with investment costs increased by 30% andtransport demand decreased by 30%.The impact of the new scenarios on the Net Present Value and Economic Rate of Return for each Optionis shown in the following Table. The ranking of the two projects remains the same, but in this pessimisticscenario the performance indicators of both options become negative, highly negative for Option 1 andmarginally negative for Option 2.Table 4.20 Project performances in the scenario analysisERR (%)ENPV (Millions of Euros)Option 1Base case 15.1 938.1Pessimistic scenario 1.9 - 347Option 2Base case 14.9 1,953.3Pessimistic scenario 4.5 - 127148
4.2.6 Risk assessmentThe risk assessment is shown here on the investment costs, which emerged as one of the critical variablesin the sensitivity test. The risk assessment has been carried out for the Option 2. Given the lack of reliablepast data on similar investment, a three point distribution has been assumed, with the following range ofvalues: a high estimate in which the investment costs are three times higher than the estimated ‘best guessvalue’, and a lower value in which the investment costs are 10% lower than the ‘best guess value’. Thishighly pessimistic assumption is based on historical data, which show a tendency towards a systematicoptimism bias in railway investment. Given the range of values adopted, the result is an asymmetrictriangular probability distribution.Figure 4.4 Probability distribution of investments costs. Triangular (0.9; 1; 3)10.90.80.70.60.50.40.30.20.10X
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ACRONYMS AND ABBREVIATIONSBAUB/CCBA
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TABLESTable 2.1 Financial analysis
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FIGURESFigure 1.1 Project cost spre
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Cohesion Fund, and through the leve
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or the plant will not reveal excess
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CHAPTER ONEPROJECT APPRAISAL IN THE
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Some specifications for financial t
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FOCUS: INFORMATION REQUIREDGeneral
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In particular, CBA results should p
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CHAPTER TWOAN AGENDA FOR THE PROJEC
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objectives, are, as far as possible
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considered the appropriate shadow p
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2.3.2 Feasibility analysisFeasibili
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This approach will be presented in
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Current assets include:- receivable
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The following items are usually not
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Mainly, the examiner uses the FRR(C
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The dynamics of the incoming flows
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eturn on their own capital (Kp). Th
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While the approach presented in thi
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2.5.1 Conversion of market to accou
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Table 2.9 Electricity price dispers
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2.5.1.2 Fiscal correctionsSome item
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previously estimated in projects wi
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FOCUS: ENPV VS. FNPVThe difference
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2.6 Risk assessmentProject appraisa
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Table 2.14 Impact analysis of criti
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Figure 2.6 Probability distribution
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eneficiary. The project proposer sh
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There are many ways to design an MC
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PROJECT APPRAISAL CHECK-LISTCONTEXT
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- reduction of congestion by elimin
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- the methods applied to estimate e
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- the marginal external costs: cong
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- the benefits for the existing tra
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The following tables show some refe
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3.1.1.6 Risk assessmentDue to their
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As shown in Figure 3.1, only under
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3.1.3.7 Other project evaluation ap
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- Waste Management Hierarchy rules
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The time horizon for a project anal
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3.2.1.7 Other project evaluation ap
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every user support the total costs
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Territorial reference frameworkIf t
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Page 101 and 102: projects, as in other sectors in wh
Page 103 and 104: 3.2.3.2 Project identificationBasic
Page 105 and 106: 3.2.3.7 Other project evaluation ap
Page 107 and 108: In order to evaluate the overall im
Page 109 and 110: for regassification plants, number
Page 111 and 112: Examples of objectives are:- change
Page 113 and 114: decontamination if any;- the techni
Page 115 and 116: 3.3.3.6 Risk AnalysisCritical facto
Page 117 and 118: 3.3.4.6 Risk assessmentCritical fac
Page 119 and 120: 3.4.1.5 Economic analysisThe follow
Page 121 and 122: Financial inflows• Admission fees
Page 123 and 124: expectancy suitably adjusted by the
Page 125 and 126: The time horizon for project analys
Page 127 and 128: A Cost-Benefit Analysis should cons
Page 129 and 130: CHAPTER FOURCASE STUDIESOverviewThi
Page 131 and 132: - finally, there is the traffic tha
Page 134 and 135: c) Road users producer’s surplus:
Page 136 and 137: 4.1.5 Scenario analysisTwo scenario
Page 138 and 139: The financial performance indicator
Page 140 and 141: Table 4.10 Economic analysis (Milli
Page 142 and 143: Table 4.12 Financial return on capi
Page 144 and 145: 4.2 Case Study: investment in a rai
Page 146 and 147: 4.2.4 Economic analysisThe benefits
Page 150 and 151: Figure 4.6 Results of the risk anal
Page 152 and 153: Table 4.22 Economic analysis (Milli
Page 156 and 157: 4.3 Case Study: investment in an in
Page 158 and 159: ate of 0.6% per year is assumed for
Page 160 and 161: The shadow price of the CO 2 avoide
Page 162 and 163: As a result, the probability distri
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Page 168 and 169: 4.4 Case Study: investment in a was
Page 170 and 171: 4.4.2 Financial analysisAlthough in
Page 172 and 173: THE CALCULATION OF REVENUESReferrin
Page 174 and 175: 0.15 m 3 /m 2 a depreciation of 20%
Page 176 and 177: As result, the probability distribu
Page 178 and 179: Figure 4.13 Probability distributio
Page 180 and 181: Table 4.48 Financial return on nati
Page 182 and 183: Table 4.50 Financial return on priv
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Page 186 and 187: 4.5 Case Study: industrial investme
Page 188 and 189: 4.5.4.1 Investment costsThe total i
Page 190 and 191: Finally, a residual value was estim
Page 192 and 193: This analysis shows the need to pay
Page 194 and 195: Table 4.62 Financial return on inve
Page 196 and 197: Table 4.64 Return on private equity
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Table 4.66 Economic analysis (thous
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ANNEX ADEMAND ANALYSISDemand foreca
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The method applied for the forecast
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Furthermore, travel demand depends
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This Guide supports a unique refere
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A higher discount rate for countrie
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Figure C.1 Project ranking by NPV v
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The main problems with this indicat
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EXAMPLE OF SHADOW WAGE IN DUAL MARK
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Another exhaustive way to include d
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Figure E.2 Percentage of low income
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ANNEX FEVALUATION OF HEALTH &ENVIRO
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Figure F.1 Main evaluation methodsS
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- expenditure on capital equipment
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due to air pollution or water conta
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BENEFIT TRANSFER - SELECTED REFEREN
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ANNEX GEVALUATION OF PPP PROJECTSIt
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adjustments for Competitive Neutral
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ANNEX HRISK ASSESSMENTIn ex-ante pr
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Reference ForecastingThe question o
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Figure H.5 Levels of risks in diffe
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ANNEX IDETERMINATION OF THE EU GRAN
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A.4. Technological Alternatives and
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GLOSSARYAccounting period: the inte
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Market price: the price at which a
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BIBLIOGRAPHY1. ReferencesBelli, P.,
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Ray, A. 1984, Cost-benefit analysis
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EnvironmentGeneralAtkinson, G., 200
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European Commission, DG Tren, 2003,
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Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

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