Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

GLOSSARYAccounting period: the interval between successive entries in an account. In project analysis, the accounting periodis generally one year, but it could be any other convenient time period.Accounting prices: the opportunity cost of goods, sometimes different from actual market prices and fromregulated tariffs. They are used in the economic analysis to better reflect the real costs of inputs to society, and thereal benefits of the outputs. Often used as a synonym for shadow prices.Accounting unit: the unit of account that makes it possible to add and subtract unlike items. Euro is the unit ofaccount for the appraisal of EU financed projects.Appraisal: the ex-ante analysis of a proposed investment project to determine its merit and acceptability inaccordance with established decision-making criteria.Benefit-cost ratio: the net present value of project benefits divided by the net present value of project costs. Aproject is accepted if the benefit-cost ratio is equal to or greater than one. It is used to accept independent projects,but it may give incorrect rankings and often cannot be used for choosing among mutually exclusive alternatives.Benefits transfer: the benefits transfer method can be defined as the use of a good value estimate in one site, the‘study site’, as a proxy for values of the same good in another site, the ‘policy site’.Border price: the unit price of a traded good at the country's economic border. For exports, it is the f.o.b. (free onboard) price, and for imports, it is the c.i.f. (cost, insurance, and freight) price. The economic border for a MemberState of the EU can be with non-EU members or wherever there are substantial differences in observed pricesbecause of market distortions.Business as usual scenario: a reference scenario which assumes that future evolution is an extension of the currenttrends. See also ‘do nothing scenario’.Constant prices: Prices that have been deflated by an appropriate price index based on prices prevailing in a givenbase year. They should be distinguished from current or nominal prices.Consumer’s surplus: the value consumers receive over and above what they actually have to pay.Conversion factor: the factor that converts the domestic market price or value of a good or production factor to anaccounting price.Cost-Benefit analysis: conceptual framework applied to any systematic, quantitative appraisal of a public or privateproject to determine whether, or to what extent, that project is worthwhile from a social perspective. Cost-benefitanalysis differs from a straightforward financial appraisal in that it considers all gains (benefits) and losses (costs) tosocial agents. CBA usually implies the use of accounting prices.Cost/effectiveness analysis: CEA is an appraisal and monitoring technique used when benefits cannot bereasonably measured in money terms. It is usually carried out by calculating the cost per unit of ‘non monetised’benefit and is required to quantify benefits but not to attach a monetary price or economic value to the benefits.Current prices: (Nominal prices) prices as actually observed at a given time. They refer to prices that include theeffects of general inflation and should be contrasted with constant prices.Cut-off rate: the rate below which a project is considered unacceptable. It is often taken to be the opportunity costof capital. The cut-off rate would be the minimum acceptable internal rate of return for a project or the discount rateused to calculate the net present value, the net-benefit investment ratio, or the benefit-cost ratio.Discount rate: the rate at which future values are discounted to the present. The financial discount rate andeconomic discount rate may differ, in the same way that market prices may differ from accounting prices.Discounting: the process of adjusting the future values of project inflows and outflows to present values using adiscount rate, i.e. by multiplying the future value by a coefficient that decreases with time.Do-minimum: the project option that includes all the necessary realistic level of maintenance costs and a minimumamount of investment costs or necessary improvements, in order to avoid or delay serious deterioration or to complywith safety standards.Do nothing: the baseline scenario, ‘business as usual’, against which the additional benefits and costs of the ‘withproject scenario’ can be measured (often a synonym for the ‘without project’ scenario).244