Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

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ANNEX HRISK ASSESSMENTIn ex-ante project analysis it is necessary to forecast the future value of variables, with an unavoidable degree ofuncertainty. Uncertainty arises either because of factors internal to the project (as, for example, the value of timesavings, the timing of the completion of the investment etc.) or because of factors external to the project (forexample, the future prices of inputs and outputs of the project).Risk assessment, in the broad sense, requires:- sensitivity analysis;- probability distribution of critical variables;- risk analysis;- assessment of acceptable levels of risk;- risk prevention.Sensitivity analysisSensitivity analysis can be helpful in identifying the most critical variables of a specific project. See Chapter 2 for thesuggested approach.Probability distribution of critical variablesOnce the critical variables have been identified, then, in order to determine the nature of their uncertainty,probability distributions should be defined for each variable. A distribution describes the likelihood of occurrence ofvalues of a given variable within a range of possible values.There are two main categories of probability distribution in literature:- ‘Discrete probability distribution’: when only a finite number of values can occur;- ‘Continuous probability distribution’: when any value within the range can occur.Discrete distributionsIf a variable can assume a set of discrete values, each of them associated to a probability, then it is defined as discretedistribution. This kind of distribution may be used when the analyst has enough information about the variable to bestudied, to believe that it can assume only some specific values.Figure H.1 Discrete distribution0.200.150.100.050.004 6 8 10 12 14 16Continuous distributionGaussian (or Normal) distribution is perhaps the most important and the most frequently used probabilitydistribution. This distribution is completely defined by two parameters:- the mean (μ),- the standard deviation (σ).234
The degree of dispersion of the possible values around the mean is measured by the standard deviation 130Figure H.2 Gaussian distribution1.000.750.500.250.000.20% 0.30% 0.40% 0.50% 0.60% 0.70%Normal distributions occur in a lot of different situations. When there is reason to suspect the presence of a largenumber of small effects acting additively and independently, it is reasonable to assume that observations will benormally distributed.Triangular or three-point distributions are often used when there is no detailed information on the variable’s pastbehaviour. This simple distribution is completely described by a ‘High Value’, a ‘Low Value’ and the ‘Best-GuessValue’, which, respectively, provide the maximum, the minimum and the modal values of the probability distribution.Triangular Distribution is typically used as a subjective description of a population for which there is only limitedsample data, and especially in cases where the relationship between variables is known but data is scarce (possiblybecause of the high cost of collection). The precise analytical and graphical specification of a triangular distributionvaries a lot, depending on the weight given to the modal value in relation to the extreme point values.Figure H.3 Symmetric and asymmetric triangular distributions0.15600.10400.05200.000 5 10 15 20 25Productivity index0-2.00% -1.00% 0.00% 1.00% 2.00% 3.00%Accrual/year of real wage growthThe diagrams in figure H. 3 show two types of triangular distributions:- the first one is symmetric, with the high value as likely as the low ones and with the same range between themodal value and the low value and between the modal value and the high value;- the second one is asymmetric, with the high value more likely than the low ones and with a larger range betweenthe modal value and the high value than the range between the modal value and the low value (or vice-versa).If there is no reason to believe that within a range a given value is more likely to materialise than others, thedistribution obtained is called Uniform, i.e. a distribution for which all intervals of the same length on thedistribution’s support are equally probable.1302( t −t)−22σ(1f x)= eσ 2πwith − ∞ < x < ∞235
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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
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Table 4.12 Financial return on capi
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4.2 Case Study: investment in a rai
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4.2.4 Economic analysisThe benefits
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Financial investment costs have bee
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Figure 4.6 Results of the risk anal
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Table 4.22 Economic analysis (Milli
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4.3 Case Study: investment in an in
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ate of 0.6% per year is assumed for
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The shadow price of the CO 2 avoide
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As a result, the probability distri
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16 17 18 19 20 21 22 23 24 25 26 27
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4.4 Case Study: investment in a was
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4.4.2 Financial analysisAlthough in
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THE CALCULATION OF REVENUESReferrin
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0.15 m 3 /m 2 a depreciation of 20%
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As result, the probability distribu
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Figure 4.13 Probability distributio
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Table 4.48 Financial return on nati
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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
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
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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
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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 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
Page 242 and 243: A.4. Technological Alternatives and
Page 244 and 245: GLOSSARYAccounting period: the inte
Page 246 and 247: Market price: the price at which a
Page 248 and 249: BIBLIOGRAPHY1. ReferencesBelli, P.,
Page 250 and 251: Ray, A. 1984, Cost-benefit analysis
Page 252 and 253: EnvironmentGeneralAtkinson, G., 200
Page 254 and 255: European Commission, DG Tren, 2003,
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Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

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