Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

4.5.3.2 Technical features of the projectThe project implies the purchase of the land, the construction of two main buildings, the acquisition oftools, machinery, software and hardware. Moreover, the company will be responsible for establishing roadconnections between the plant site and the city’s road network.4.5.3.3 Options analysisThe government considered two alternative options:- ‘Business as usual’: the region would carry on with its limited economic growth and in particular with ahigh unemployment rate.- Supporting a productive investment in a highly-innovative sector: an alternative investment innanotechnologies was proposed. Such an investment could be highly profitable and also a goodgrowth-driver, but the uncertainties associated with the sector and the absence of an industrialenvironment sustaining the project make it too risky.In the end the government preferred the project in a more traditional sector, one that promises anincrease in social welfare and fits the present local industrial structure.4.5.3.4 Type of financingThe government can support the private investment promoter by co-financing the project in differentways:- A subsidy to cover interest- Capital grant- Tax exemption.Assuming a fixed amount of public disbursement, the main selective criterion is the time profile. For theprivate actor the preferred option would be a capital grant in order to cover the large cash outflows of theearly years due to fixed investments. The least preferred type of contribution would be tax exemptionbecause it implies no immediate cash inflows and a delayed saving of cash outflows. The subsidy for theinterest account allows the company to borrow money from the credit system to start investments at avery low interest rate and it facilitates the spreading of financial outflows over many years, thus resultingin a lower burden on the yearly budget.4.5.4 Financial analysisThe financial analysis was conducted using the main elements and parameters referred to in Point E.1. ofthe Application Form.The time horizon for evaluating the project is 10 years. The reference financial discount rate is 5%.The analysis is at constant prices, with changes in relative prices 103.The investment is expected to take three years for full realization. However, production activities will startin the second year, albeit at an initially slow rate. Indeed, in the first couple of years following fullrealization of the investment, the growth rate of production is very high, while from the sixth yearonwards it is expected to stabilise at a lower level.The following paragraphs illustrate the main categories of financial flows.103An analysis at current prices with a discount rate that includes inflation will be carried out as well (not reported here).187