Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

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This analysis shows the need to pay great attention to the forecasts of investment costs and sales. Anover-optimistic provision for sales can turn an unprofitable investment project into a profitable one: so, itis important to analyse the market dynamics and the company’s capacity to compete successfully.In order to properly assess the project risk, the risk analysis was based on an appropriate probabilitydistribution for the critical variables. In the sensitivity analysis the most critical variables identified were‘Sales of product C’ and ‘New equipment costs’.Table 4.60 Assumed probability distributions of the project variables, Monte Carlo methodVariable Applied to Range Kind of distribution NotesSales of product C Financial and economic 1,400–2,600 units Gaussian MV 104 = 2,000; SD = 180New equipment costs Financial and economic 38,000–46,000 Euro TriangularFigure 4.15 Probability distribution of sales of product C in Units – Normal distribution0,0025Probability density0,0020,00150,0010,000500,00 500,00 1000,00 1500,00 2000,00 2500,00 3000,00Values of the variableFigure 4.16 Probability distribution of new equipment costs in Euro – Triangular distribution0.000Probability density0.0000.0000.0000.0000.0000.00035,000.00 37,000.00 39,000.00 41,000.00 43,000.00 45,000.00 47,000.00Values of the variableThe results of the risk analysis (see Figure 4.17 below) show that the project is highly risky (more than40% probability of a negative ENPV). Given the modest financial return on investment and the high riskfor the economic return 105 , the project should be reconsidered and risk mitigation measures adopted.104105MV = Mean value; SD = Standard deviation.The risk is also relatively high for the private investor (the analysis is not reported here).192
Table 4.61 Probability parametersENPV (Millions of Euros)ERR%Reference value (baseline case) 3.53 6.68Mean 3.42 6.50Median 3.64 6.71Standard deviation 10.66 3.55Minimum value -29.29 -5.62Central value Mode 2.90 5.35Maximum value 35.16 16.31Figure 4.17 Probability distribution of ENPVPunctual probabilityReference valueCentralMeanSD uppCumulated probabilityMinimumMaximumSD lowMedian1.000.900.800.700.600.500.400.300.200.100.00-40,000 -30,000 -20,000 -10,000 0 10,000 20,000 30,000 40,000Figure 4.18 Probability distribution of ERRPunctual probabilityCumulated probabilityReference valueMinimumCentralMaxim umMeanSD lowSD upp1.00Median0.900.800.700.600.500.400.300.200.100.00-10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0%193
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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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every user support the total costs
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Territorial reference frameworkIf t
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Cycle and phases of the projectGrea
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One of the most important aims of t
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projects, as in other sectors in wh
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3.2.3.2 Project identificationBasic
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In order to evaluate the overall im
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for regassification plants, number
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Examples of objectives are:- change
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decontamination if any;- the techni
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3.3.3.6 Risk AnalysisCritical facto
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3.3.4.6 Risk assessmentCritical fac
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3.4.1.5 Economic analysisThe follow
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Financial inflows• Admission fees
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expectancy suitably adjusted by the
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The time horizon for project analys
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A Cost-Benefit Analysis should cons
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CHAPTER FOURCASE STUDIESOverviewThi
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- finally, there is the traffic tha
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c) Road users producer’s surplus:
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4.1.5 Scenario analysisTwo scenario
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The financial performance indicator
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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 148 and 149: Financial investment costs have bee
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
Page 166 and 167: 16 17 18 19 20 21 22 23 24 25 26 27
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
Page 184 and 185: 16 17 18 19 20 21 22 23 24 25 26 27
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 194 and 195: Table 4.62 Financial return on inve
Page 196 and 197: Table 4.64 Return on private equity
Page 198 and 199: Table 4.66 Economic analysis (thous
Page 200 and 201: ANNEX ADEMAND ANALYSISDemand foreca
Page 202 and 203: The method applied for the forecast
Page 204 and 205: Furthermore, travel demand depends
Page 206 and 207: This Guide supports a unique refere
Page 208 and 209: A higher discount rate for countrie
Page 210 and 211: Figure C.1 Project ranking by NPV v
Page 212 and 213: The main problems with this indicat
Page 214 and 215: EXAMPLE OF SHADOW WAGE IN DUAL MARK
Page 216 and 217: Another exhaustive way to include d
Page 218 and 219: Figure E.2 Percentage of low income
Page 220 and 221: ANNEX FEVALUATION OF HEALTH &ENVIRO
Page 222 and 223: Figure F.1 Main evaluation methodsS
Page 224 and 225: - expenditure on capital equipment
Page 226 and 227: due to air pollution or water conta
Page 228 and 229: BENEFIT TRANSFER - SELECTED REFEREN
Page 230 and 231: ANNEX GEVALUATION OF PPP PROJECTSIt
Page 232 and 233: adjustments for Competitive Neutral
Page 234 and 235: ANNEX HRISK ASSESSMENTIn ex-ante pr
Page 236 and 237: Reference ForecastingThe question o
Page 238 and 239: Figure H.5 Levels of risks in diffe
Page 240 and 241: 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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