Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

Finally, a residual value was estimated of €28 Million in year 10. The conversion factors applied to thebuildings, the replacement of short-life equipment and the residual value were calculated as a weightedaverage of the single components’ conversion factors.A standard conversion factor of 0.95 was used to account for generic price distortions in the country.Table 4.55 Conversion factors per type of costType of cost CF NotesSkilled labour 0.600 Shadow wage for non-competitive labour marketLand 1.235 Concession price below market priceBuildings 0.715 50% construction materials (CF=SCF), 40% labour, 10% profit (CF=0)Raw Materials 0.950 Traded goods; CF=0.95Equipment 0.990 Set like CF of machinery aggregate sector (0.99)Electricity 0.970 As in the public utilities sectorFuel 0.970 As in the public utilities sectorReplacement of short-life equipment 0.756 60% labour, 40% equipmentInvestment (weighted) 0.928 4.8% land, 27% buildings, 66.7% equipment, 1.6% patents and licensesResidual value 0.928 100% investment (weighted)The real discount rate was 5.5%, as indicated in Working Document No 4 for Cohesion Countries.Even though there will be some beneficial externalities (e.g. for other users of the roads to be built) andsome displacement effects, they were not estimated, because they were assumed to be modest. Thenegative effects deriving from the traffic congestion due to the new industrial plant will be compensatedby the new roads that the company has to build. As a negative externality, the pollutant emissions weretaken into account.It is not easy to estimate the economic value of the overall environmental damage because of the varietyof pollutant emissions and because of the lack of reliable data about the volume of emissions for industrysectors other than those subject to emission limitation regulation. The company will provide anenvironmental impact assessment carried out by external experts from which it may be possible to identifythe volume of each pollutant produced during the industrial process.An average emission of 0.5 ton of CO 2 per unit of production was assumed. A prudential economic valueof €8 was applied to 1 ton of CO 2 .The economic performance is better than the financial return on investment (see Table 4.62) mainlythanks to the socio-economic valuation of the costs. In fact the economic analysis gave these performanceindicators:- Economic Net Present value ENPV €3,537,540- Economic Internal Rate of Return ERR 6.7%- Benefit Cost Ratio BCR 1.024.5.6 Risk assessmentIn order to assess the project risk, a sensitivity analysis was carried out as a first step. Moreover, as statedin Regulation (EC) 1086/2006, a complete risk assessment was also conducted.For industrial investment projects the two most critical variables are the sales and the investment costs.Operating costs are also critical, but in this case they have been calculated as a function of sales, thereforethey are directly correlated to them.Consequently, a sensitivity analysis that considers possible variations in operating costs and items ofinvestment costs must be carried out.190