Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

Although the investment horizon is often indefinite, in project analysis it is convenient to assume reachinga point in the future when all the assets and all the liabilities are virtually liquidated simultaneously.Conceptually, it is at that point that one can cost up the accounts and verify whether the investment was asuccess. This procedure entails choosing a particular time horizon. The choice of time horizon may havean extremely important effect on the results of the appraisal process and may also affect the determinationof the EU co-financing rate.For the majority of infrastructures the time horizon is at least 20 years; for productive investments, andagain indicatively, it is about 10 years. Nevertheless, the time horizon should not be so long as to exceedthe economically useful life of the project.In practice, it is helpful to refer to a standardbenchmark, differentiated by sector and basedon some internationally accepted practices. Anexample is shown in Table 2.2. Each projectproposer, however, can justify the adoption of aspecific time horizon based on project-specificfeatures.Having set the horizon, the investment costs areclassified by (see Table 2.3):- fixed investments,- start-up costs, and- the changes in working capital over the entiretime horizon.Table 2.2 Reference time horizon (years)recommended for the 2007-2013periodProjects by sectorYearsEnergy 25Water and environment 30Railways 30Roads 25Ports and airports 25Telecommunications 15Industry 10Other services 15Source: OECD (1993)2.4.1.1 Fixed investmentsFixed investments are often, but not always, the largest component of total investment costs.The information relating to fixed investments will be taken from the feasibility study data on localisationand technology. The data to consider are the incremental cash disbursements encountered in the singleaccounting periods to acquire the various types of fixed assets: land, buildings, machinery, etc.The residual value of the fixed investment must be included within the fixed investment costs account forthe end-year with opposite sign (negative if the others are positive), because it is considered as an inflow.2.4.1.2 Start-up costsAccording to a standard definition, all those costs that are incurred in view of the effects that will accruebeyond the financial period in which the relative disbursements were made are of an investment nature.Although the tax rules do not always allow for the capitalization of these costs, they should be included inthe total investment costs. These include several start-up costs, such as: preparatory studies (including thefeasibility study itself), costs incurred in the implementation phase, contracts for the use of someconsulting services, training expenses, research and development, issue of shares and so on.2.4.1.3 Changes in working capitalIn some types of projects, particularly in the productive sector, the initial investment in working capital issizeable. Net working capital is defined as the difference between current assets and current liabilities. Itsincrease over one period of time corresponds to an investment outlay. The estimation depends on theanalysis of demand for credit from customers or other users of the service, on technological and businessinformation on average stocks needed, on information on the credit usually offered by suppliers and onthe assumption about the cash needed over time.35