Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

high risk of investing in the area. Nevertheless, thanks to the contribution of EU funds, the company hasa strong incentive to implement the investment, because it is guaranteed a satisfactory return on its equity.The project performance in terms of return on private equity is computed by including in the outflowsonly the private equity (plus loan reimbursement and interest), thus disregarding both the contribution ofthe national public sector and the EU as financial outflows. The return in this case is higher, since it isintended to remunerate the risk of the private investor (see below, Risk Assessment).The financial performance indicators are:- Financial Net Present Value (investment) FNPV(C) -€5,472,500- Financial Rate of Return (investment) FRR(C) 3.3%- Financial Net Present Value (capital) FNPV(K) €10,458,180- Financial Rate of Return (capital) FRR(K) 9.3%- Financial Net Present Value (private equity) FNPV(K p ) €14,958,180- Financial Rate of Return (private equity) FRR(K p ) 11.8%4.5.4.4 Financial sustainabilityOne of the most relevant issues to be checked is the financial sustainability of the project, which impliesthat, for each year, the cumulated sum of the net inflows must be higher than the outflows of that year.The financial resources must be organised in order to satisfy this condition.The financial resources planned are as follows:- EU grant => €14,170,000- Total national public contribution => €4,725,000- Loans from credit system => €10,000,000- Private equity => €33,608,0000The EU grant is equal to the eligible costs (€63,000,000) * 30% (State Aid plafond) * 75% (co-financingrate). In the case of productive investment projects the funding-gap method is not applicable on the basisof Article 55(6) of Regulation 1083/2006. Therefore the national contribution is equal to 63,000,000 *30% * 25%.The real interest rate on loans was assumed to be 5%.In order to guarantee the financial sustainability and capacity to minimise interest expenditure, thecompany will input its own capital in the first three years and will obtain the financial inflows from loansin the third year. The projected loan reimbursement is shown in the financial sustainability table.4.5.5 Economic analysisThe starting point for the economic analysis is the financial analysis. Specific conversion factors andstandard conversion factors were used to convert market prices into prices adjusted for marketimperfections.The Value Added Tax on raw materials was eliminated. In a similar way, the energy costs were considerednet of taxation. The labour cost was considered net of insurance contributions and income taxes becausethe reservation wage was to be taken as the shadow wage, due to high unemployment in the area. Saleswere to be accounted net of Value Added Tax.Land is provided by the local government at a concession price that is below the market price; for thisreason a conversion factor of 1.235 was applied.189