Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

Risk analysis: a study of the odds of the project's earning a satisfactory rate of return and the most likely degree ofvariability from the best estimate of the rate of return. Although risk analysis provides a better basis than sensitivityanalysis for judging the riskiness of an individual project or the relative riskiness of alternative projects, it doesnothing to diminish the risks themselves. It helps, however to identify risk prevention and management measures.Real rates: rates deflated to exclude the change in the general or consumption price level (for example real interestrates are nominal rates less the rate of inflation).Relative prices: the exchange value of two goods, given by the ratio between the quantity exchanged and theirnominal prices.Residual value: the net present value of assets at the end of the final year of the period selected for evaluationanalysis (project horizon).Scenario analysis: a variant of sensitivity analysis that studies the combined impact of determined sets of valuesassumed by the critical variables. It does not substitute the item-by-item sensitivity analysis.Sensitivity analysis: the analytical technique to test systematically what happens to a project's earning capacity ifevents differ from the estimates made in planning. It is a rather crude means of dealing with uncertainty about futureevents and values. It is carried out by varying one item and then determining the impact of that change on theoutcome.Shadow prices see accounting prices.Short-run: the time period in the production process during which certain factors of production cannot be changed,although the level of utilisation of variable factors can be altered.Social discount rate: to be contrasted with the financial discount rate. It attempts to reflect the social view on howthe future should be valued against the present.Socio-economic costs and benefits: opportunity costs or benefits for the economy as a whole. They may differfrom private costs and benefits to the extent that actual prices differ from accounting prices.Tradable goods: goods that can be traded internationally in the absence of restrictive trade policies.Willingness-to-pay: the amount consumers are prepared to pay for a final good or service. If a consumer’swillingness-to-pay for a good exceeds its price, the consumer enjoys a rent (consumer’s surplus).Without project scenario: the baseline scenario against which the additional benefits and costs of the with projectscenario can be measured (e.g. business as usual).247