OROMIA STATE UNIVERSITY

+-
COLLEGE OF DEVELOPMENT STUDIES

DEPARTMENT OF ECONOMICS

Development Planning & Project Analysis II

OSU, 2023

October,2023
Batu,Oromia,Ethiopia

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CHAPTERONE:BASIC CONCEPTS

1.1. THE PROJECT CONCEPT

Definition: What is a Project?

Different organizations and authors provide different definitions for the concept project.
 A project is a proposal for an investment to create, expand and/or develop certain
facilities in order to increase the production of goods/services/during a certain
period of time in a community, region, country, market area and/or certain
organization (firm, public organization, NGO, etc).
 A project is defined as a complex economic activity in which scarce resources are
committed in the expectation of benefits that exceed these resources (costs).
 According to Little and Mirrlees, a project is a scheme, or part of scheme, for
investing resources which can reasonably be analyzed and evaluated as an
independent unit.
 A project is an investment activity upon which resources are expended to create
capital assets that will produce benefits over an extended period of time and which
logically lends itself to planning, financing and implementation as a unit. A specific
activity, with specific starting point and specific ending point, intended to
accomplish a specific objective.(Gittingger,1982)

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Generally, a project is:-

 An investment activity which lends itself to planning, financing and implementation as a unit;
 Expressed in terms of definite location, time and target group or beneficiaries;
 Expected to generate specific output (benefit) after its completion;
 Managed by a separate administrative structure or operated through the existing structure.
Basic characteristics of a project
1. A project involves the investment of scarce resources in the expectation of future
benefits.
 Projects have specific benefits that can be identified, quantified and valued, either socially or
monetarily/commercially/.
2. Projects have measurable objectives
 Projects have specific beneficiaries which need to be specifically spelt out during project
planning.
3. A project is the smallest operational unit.

 A project can be planned, financed and implemented as a unit. 

Despite the fact that a project constitutes many activities and tasks, it is defined as the smallest
operational unit. Because, it is bounded by different factors. These are:
 Projects are conceptually bounded.
 The problem and specific objective of a project involvesconceptual delimitations.
 Projects are geographically bounded.
 Projects are organizationally bounded.
 There should be certain organizational unit responsible for project implementation.
 Projects are time bounded.
 Projects have specific lifetime, with a specific start and end time.

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4. Uncertainty and risks is inherent in any project.

 Achieving project objectives cannot be predicted in advancewith accuracy.
The factors that make project risk are:
A.Significant and multiple types of scarce resources arecommitted today expecting outcome in
the future;
B. Benefits are expected to be generated in the future, which isless predictable;
C. Capital investments are irreversible, i.e. exit has its own costs.
5. It has a scope that can be categorized into definable tasks.
Projects usually have well defined sequence of investment andproduction activities
6. It may require the use of multiple resources.
 This has an implication on management of project implementation.
 The more diverse the types of resources are mobilized, the more complex will the
management be.
 The outcome of project and hence development endeavour is sensitive to the management of
each type of resources.
 All managed resource can contribute more to cost than to benefit.

Why Project Planning?

 There is basic economic problem of scarcity in the face of unlimited needs.

 This leads to make choices on the means and ends of development, which involves the
rational use of limited resources to attain the economic ends.
 Thus, investment decisions are an essential part of the development process.
 The more sound the investment decision is, the more success will be in the development
endeavor.

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The need for project planning, preparation and study emanates from:
A. The quest for change: dissatisfaction with the present and/or pressure or incentive for
improvement in the future
B. Change involves investment/commitment of resources to realize the objectives.
C. The scarcity of investible resources and unlimited development/business needs;
D. Investment is all about resource commitment into the future, which is less predictable;
E. An investment schemes have an inherent high risk
F. The costs and benefits are temporally spread and particularly the large part of the costs is
incurred earlier and the benefits are generated later on.
 This raises the question of comparing and equating the future and present values.
G. Decision-making is not simple and perfect as it is assumed inorthodox economics.
These features of investment decisions constitute:
 The reasons that justify the significance and relevance of project planning and
 The major constraints and challenges faced by any project planner and decision maker in
project viability studies.
 Thus, decision makers have to make every effort to systematically rationalize their decisions by
undertaking rigorous viability studies.

TYPES OF PROJECTS (CLASSIFICATION OF PROJECTS)

There are different types of projects. That is; a projectcan be;
– New, updating and / or expansion
– Market based, Resource based, Felt need
– Private, NGOs, and/or government/public
–Industrial, Agricultural and Service

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1.2. THE PROJECT CYCLE

 A project cycle is a sequence of events, which a project follows. These events, stages
or phases can be divided differently by various scholars and institutions into several
equally valid ways, depending on the executing agency or parties involved. Some of
these stages may overlap. The most common classification in the literature is the
following:
 There are several models of project cycle but the most important ones are:
 Baum Project Cycle Model- developed by WB

 The UNIDO project cycle model.

Figure 1:Baum Project Cycle Model

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Figure 2: The UNIDO project cycle model

Alternatively, we can categorize project cycle in to three main phases (UNIDO, 1991)
1. Pre-investment phase
A. Identification/opportunity study/
B. Pre-feasibility study/ pre-selection/
C. Feasibility study
D. Support study;
E. Appraisal study

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2. Investment phase
A. Negotiating and contracting;
B. Engineering design;
C. Construction;
D. Procurement
E. Erection and installation
F. Pre-production marketing;
G. Manning and training
3. Operation phase
A. Commissioning and hand over and starting of operation
B. Post project evaluation/appraisal/
C. Replacement/rehabilitation
D. Expansion/innovation

1. Identification (Opportunity studies)

Project starts by generalizing potential idea that can be converted in to meaningful

project and contribute towards achieving specified business and development objectives.
Thus the first stage in the project cycle is to find potential projects. It is idea generation
and identification of investment opportunities. This identification of promising
investment opportunities (projects) require imagination, sensitivity of environmental
changes and a realistic assessment of what the firm can do.

Project ideas can emanate from a variety of sources. Much depends on the experience,
and even the imagination, of those entrusted with the task of initiating project ideas such

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as technical specialists and local leaders. In general, one can distinguish two levels where
project ideas are born: the macro level and the micro level.

Generally, the idea for project may come from the following sources
 From the need to make profitable use of available resources (this is for resources
based projects)
 Market based projects arise from an identified demand in home or overseas market
 Need based project may arise from the need of community (company) to make
available some basic materials (services) requirements.
At the macro level, project ideas emerge from:

 National policies, strategies and priorities as may be initiated from time to time;
 National, sectorial, sub-sectorial or regional plans and strategies supplemented by
special studies, sometimes called opportunity studies, conducted with the aim of
translating national and sectorial sub-sectorial and regional programs into specific
projects;
 General surveys, resource potential surveys, regional studies, master plans,
statistical publications which indicate directly or indirectly investment opportunities;
 Constraints on the development process due to shortage of essential infrastructure
facilities
 A possible external threat that necessitates projects aiming at achieving, for example,
self-sufficiency in basic materials, energy, transportation, etc;
 Unusual events such as draughts, floods, earth-quake, hostilities, etc.;

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 Government decision to create project-implementing capacity in such areas as

construction, etc

At the macro-level, project ideas can also originate from multilateral or bilateral
development agencies and as a result of regional or international agreements on which
the country participates. In addition individual/entrepreneurial/ inspiration,
institutions, workshops, trade fairs, development experiences of other countries may
point to some interesting project ideas.
At the micro-level, the variety of sources is equally broad. Project ideas may emanate
from:
 The identification of unsatisfied demand or needs.
 The existence of unused or underutilized natural or human resources and the
perception of opportunities for their efficient use.
 The need to remove shortages in essential material services, or facilities that
constrain development efforts.
 The initiative of private or public enterprises in response to incentives provided by
the government.
 The necessity to complement or expand investments previously undertaken, and
 The desire of local groups or organizations to enhance their economic status and
improve their welfare.
Project proposals can also originate from foreign firms seeking for their profit

2. Project preparation and Analysis phase

Once project ideas have been identified and selected for further examination, the
process of project preparation and analysis starts. Project preparation must cover the
full range of technical, institutional, economic, and financial conditions necessary to

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achieve the project’s objective.

It involves generally three to four steps:
 Pre-feasibility studies
 Feasibility studies
 Support studies;
 Appraisal of studies
Pre-feasibility Study (Pre-selection/ Preliminary Screening)
The identification process will give the background information for defining the basic
concept project, which leads to the feasibility study stage. Once a project proposal is
identified, it needs to be examined. Once some project ideas have been put forward,
the first step is to select one or more of them as potentially promising. To begin with, a
preliminary project analysis is done. A prelude to the full blown feasibility study, this
exercise is meant to assess whether the project is prima facie worthwhile to justify a
feasibility study and What aspects of the project are critical to its variability and hence
warrant an in -depth investigation.

At this stage, the screening criteria are rough and vague, becoming specific and refined
as project planning advances. During preliminary selection, the analyst should eliminate
project proposals that are technically unsound and risky, have no market for their
output, have inadequate supply of inputs, are very costly in relation to benefits, assume
over ambitious sales and profitability, etc.

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Some kind of preliminary screening is required to eliminate ideas, which prima facie,
are not promising. For this purpose the following aspects may be looked into:

 Compatibility with the promoter

 Consistency with government priorities
 Availability of inputs and other resources
 Adequacy of market
 Reasonableness of cost, and
 Acceptability of risk level
When a firm evaluates a large number of project ideas, it may be helpful to stream line
the process of preliminary screening. For this purpose, a preliminary evaluation may
be translated into project rating index. The steps involved in determining the project-
rating index are as follows:
a) Identify factors relevant for project rating
b) Assign weights to these factors (the weights are supposed to reflect their relative
importance)
c) Rate the project proposal on various factors, selecting a suitable rating scale
d) For each factor multiply the factor rating with the factors weight to get the factor
score
e) Add all the factor scores to get the overall project-rating index.

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Example of project rating index

Assume that the following factors are identified to be relevant for project rating

Factors Factor
weight
Technical know-how 0.20
Input availability 0.15
Reasonableness of cost 0.20
Adequacy of market 0.05
Stability 0.10
Dependence of firm’s strength 0.20
Consistency with government 0.10
priorities
If the firm uses five rating scale, determine the rating index for the project
Factor Factor Rating Factor
weight 5 4 3 2 1 Score
Technical know-how 0.20  0.80
Input Availability 0.15  0.45
Reasonableness of costs 0.20  1.00
Adequacy of market 0.05  0.20
Stability 0.10  0.50
Dependence of firm’s strength 0.20  0.40
Consistency with gov’t priorities 0.10  0.50
Rating index 3.85

Once the project-rating index is determined, it is compared with a pre-determined

hurdle value to judge whether the project is prima facie worthwhile or not. As a result
of the preliminary screening exercise, a project profile, an opportunity study report,
or an identification study report, as appropriate, is prepared showing which project
alternatives should be rejected and which ones may be advanced to the next stage.

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Feasibility Study
The major difference between the pre-feasibility and feasibility studies is the amount of
work required in order to determine whether a project is likely to be viable or not. If
the preliminary screening suggests that the project is prima facie worthwhile, a
detailed analysis of the marketing, technical, financial, economic, and ecological
aspects is undertaken. Feasibility study provides a comprehensive review of all aspects
of the project and lays the foundation for implementing the project and evaluating it
when completed.

The focus of this phase of capital budgeting is on gathering, preparing, and

summarizing relevant information about various project aspects, which are being
considered for inclusion in the capital investment. Based on the information developed
in this analysis, the stream of costs and benefits associated with the project can be
defined.
At this stage a team of specialists (scientists, engineers, economists, sociologists etc. )
will need to work together. At this stage more accurate data need to be obtained and if
the project is viable it should proceed to the project design stage. Appraisal should
cover major aspects like technical, institutional, economic and financial.
The final product of this stage is a feasibility report. The feasibility report should
contain the following elements:

 Technical analysis (materials & Inputs, technology and engineering works,

construction, infrastructure)
 Socio-economic analysis (economic benefits and costs like reducing income
inequality , inflation etc)

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 It takes in to account intangible and opportunity costs and benefits which the
financial analysis don’t.)
 Environmental analysis Note that, if technical and financial feasibility are not
fulfilled by the project, then it must automatically be stopped.

3. Appraisal of an investment Decision

Thus project appraisal can be defined as a second look at the project report by a team
of professionals, who were not participated in the preparation of the study but
qualified and experienced to evaluate such studies. It is or should be an independent
assessment of the project to identify the weaknesses and strengths of the study that
have a bearing on the decision to invest, and/or to finance the project.

After a project has been prepared and analyzed, it is appropriate to forward for a
critical review (external review). This provides an opportunity to reexamine every
aspect of the project plan to assess whether the proposal is appropriate and sound
before large sums are committed.

Appraisal is the comprehensive and systematic assessment of all aspects of a project

study, addressing particularly issues like: specificity of objectives;
 Clarity of problems;
 Methodology: type and source and appropriateness of data collection techniques
and analysis techniques;
 Project specific factors.

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When a feasibility study is completed the various parties involved in the project will
carry out their own appraisal of the investment project in accordance with their
individual objectives and evaluation of expected risks, costs and gains.

The appraisal report concentrates on the health of the company to be financed, the
returns obtained by equity holders and the protection of its creditors. The techniques
applied to appraise the project in line with these criteria center around technical,
commercial, market, managerial, organizational, and financial and possibly also
economic aspects. The findings of this type of appraisal enter into the appraisal report.
Appraisals as a rule deal not only with the project but also with the industries in which
it will be carried out and its implications for the economy as a whole. For large-scale
projects, appraisal report will require field missions to verify the data collected and to
review all those factors of a project that are conditioned by its business environment,
location and markets and the availability of resources.

The prime objective of project appraisal should be to identify the weaknesses that have
bearing on decision-making and identify means of strengthening it adequately to ensure
final success of the project. The main objective is then to improve and revamp the
project.
Selection of projects/investment alternatives/
The feasibility study would enable the project analyst to select the most likely project
out of several alternative projects.

Project selection involves different factors and forces. It involves political, social and
economic variables. Essentially it is a political process in the sense that despite

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economic Rationality, political forces could exert significant pressure on the decision
making process on the selection of projects from available alternatives.
After appraisal studies the decision maker will have to select one or a number of
projects on the bases of pre- established evaluation/selection criteria.

4. Implementation/Investment phase/
After the project design is prepared then mobilizing resources which include
negotiations and lending and borrowing contracts with the funding organization starts
and once source of finance is secured implementation follows.

Implementation is the most important part of the project cycle because the objective of
any effort in any project planning and analysis is to have a project that can be
implemented to the benefits of the society. The better and more realistic the project
plan is the more likely it is that the plan can be carried out and the expected benefits
realized.
Project implementation must be flexible since circumstances change frequently.
Technical changes are almost inevitable as the project progresses; price changes may
necessitate adjustments to input and output prices; political environment may change.
Translating an investment proposal into a concrete operational unit is a complex, time
consuming and risk fraught task. Delays in implementation, which are common, can
lead to substantial cost overrun. For expeditious implementation at a reasonable cost,
the following are helpful.
Adequate formulation of projects.A major reason for the delay is inadequate
formulation of projects. Put differently if necessary homework in terms of preliminary
studies and comprehensive and detailed formulation of projects is not done, many
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surprises and shocks are likely to spring on the way. Hence the need for adequate
formulation of the project cannot be overemphasized.

Use of the principle of responsibility and accounting.Assigning specific

responsibilities to project managers for completing the project within the defined time
frame and cost limits is helpful in expeditious execution and cost control.
Develop project management competence:
The investment phase can be divided into the following stages:
1. Investment period –construction and startup period which includes:
 Establishing project management office which involve establishing of the legal,
financial and organizational basis for the implementation of the project

 Technology acquisition and transfer, including basic and detailed engineering,

which include tender preparation (hence developing the terms of reference),
2. Development period/ Operational phase- from start up production to full capacity
utilization
3. Full development period- the period beyond full production.
Implementation basically involves capability in project management. The function of
project management is to foresee or predict as many of the dangers and problems as
possible and to plan, organize and control

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5. Ex-post Evaluation
The final phase of the project is the evaluation phase. It is a systematic look at the
elements of the successes and failures in the project experience to learn how better to
plan for the future. In this stage it is important to examine the project plan and what
really happened and the extent to which the objectives of a project are being realized
provides to the primary criterion for the evaluation.

Performance review and evaluation should be done periodically to compare actual

performance with projected performance. The evaluation may be done by the project
management, the sponsoring agency, planning agency, external evaluators or other
bodies.
It is useful in several ways:
i. It throws light on how realistic were the assumptions underlying the project;
ii. It provides a documented log of experience that is highly valuable in future
decision making;
iii. It suggests corrective action to be taken in the light of actual performance;
iv. It helps in uncovering judgment biases;
v. It induces a desired caution among project sponsors.
Weakness and strengths should carefully be noted so as to serve as important lessons
for future project analysis undertaking. Evaluation is not limited only to completed
projects. Ongoing projects could also be evaluated to rectify problems when the
project is in trouble.

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CHAPTER TWO: FINANCIALANALYSIS AND APPRAISAL OFPROJECTS

2.1 Scope and Rationale for Financial Analysis

ofProjects
2.1.1. What is financial analysis?
The financial analysis is all about the assessment, analysis and evaluation of the required
project inputs, the outputs to be produced/generated/ and the future net benefits,
(expressed in financial terms) with the aim of determining the viability of a project to
the private investor or the executing entity public body.

Every project has to be first analyzed in terms of its timely implementation and
financing. It is concerned with assessing the feasibility of a new project from the
point of view of its financial results.

It will be worthwhile to carry out a financial analysis if the output of the project can be
sold in the market or can be valued using market prices. The project’s direct benefits
and costs are, therefore, calculated in pecuniary terms at the prevailing (expected)
market prices. This analysis is applied to appraise the soundness and acceptability of a
single project as well as to rank projects on the basis of their profitability. (UNDO,
1980, P.37). The commercial analysis deals with two issues:
Investment profitability analysis
Financial analysis/ ratio analysis
The two types of analysis are complementary and not substitutable. In fact in
the relevant literature commercial analysis and financial analysis are used
interchangeably. Whatever the terminology, the investment profitability analysis is the
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measurement and assessment of the profitability of the resources put into a project.
1. Investment profitability analysis
The investment profitability analysis is an assessment of the potential earning power of
the resources committed to a projectwithout taking into account the financial
transactions occurring during the project’s life.
Investment profitability analysis, with different methods of analysis;
a. Simple methods of analysis of rate of return/static methods/ non-
discounted techniques/.
This includes:
 Simple rate of return:
 Pay-back period:
b. Discounted-cash-flow methods/dynamic methods

Net Present Value/NPV/;

Internal Rate of Return/IRR/
2. Financial analysis/ ratio analysis/
Financial analysis (ratio analysis) has to take into account the financial features of a
project to ensure that the disposable finances shall permit the smooth implementation
and operation of the project. (UNDO, 1980, P.37)
a. Liquidity analysis;0
b. Capital structure analysis (debt-equity ratio).
The two types of analysis are complementary and not substitutable.

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2.1.2 Why one undertakes Financial Analysis? or When to undertake

financial analysis?
Commercial/financial analysis applies to private and public investments. A private
firm will primarily be interested in undertaking a financial analysis of any project it is
considering and seldom will it undertake an economic analysis.

We undertake financial and economic analysis of projects to compare costs and

benefits and determine which among alternative investments have an acceptable return.
The costs and benefits of a proposed project therefore must be identified, priced and
their economic values determined.

The issue of financial sustainability of a public project justifies the need for undertaking
financial analysis. But commercially oriented government authorities that are selling
output such as railway, electricity, telecommunications, etc., will usually undertake a
financial and an economic analysis of any project it is undertaking.

Even non-commercially oriented government institutions may sometimes wish to

choose between alternative facilities on the basis of essentially financial objectives.

Commercial profitability analysis is the first step in the economic appraisal of a project.
A comprehensive financial analysis provides the basic data needed for the economic
evaluation of the project and is the starting point for such evaluation. In fact economic
analysis mainly involves of adjustments of the information used in financial analysis and
of a few additional ones. The procedure and methodology in financial analysis is
basically the same with that of economic analysis. Yet one has to recognize and realize
the differences between the two.
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It has to be noted that the financial analyst should be able to communicate and know
what to ask from the different team members to collect relevant information on:
1. Revenue, both forecasted sales and selling price
2. Initial investment costs distributed over the implementation of the project;
3. Operating costsof the envisaged operational unit/firm/ over its operating life.
The issues and concerns of financial analysis are:
1. Identification of required data;
2. Analysis of the reliability of data;
3. Analysis of the structure and significance of costs andbenefits/incomes/;
4. Determination and evaluation of the annual and accumulatedfinancial net benefits;
expressed as profitability, efficiency oryield of the investment;
5. Consideration of the spread of flows of the costs and benefit over time, the
economic life of the envisaged economicunit/firm/public entity/;
6. Costs of capital over time;

Planning Horizon and Project Life

The project planning horizon of a decision maker may be defined as the period of time
over which he/she decides to control and manage his/her project-related business
activities, or for which he/she formulates his/her investment or business development
plan. The planning horizon must consider the life time of a project.

The economic life, that is, the period over which the project would generate net
gains, depends basically on the technical or technological life cycle of the main plant
items, on the life cycle of the product and of the industry involved, and on the

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flexibility of a firm in adapting its business activities to changes in the business

environment. When determining the economic life span of the project various factors
have to be assessed, some of which are as follows:
 Duration of demand (position in the product life cycle);
 Duration of raw material deposits and supply;
 Rate of technical change;
 Life cycle of the industry;
 Duration of building and equipment;
 Opportunities for alternative investment;
 Administrative constraints (urban planning horizon).

It is evident that the economic life of a project can never be longer than its technical
life or its legal life; in other words it must be less than or equal to the shorter of the
latter.

2.2 Identification and Analysis of the Estimates of Costs and

Benefits
In project analysis, the identification of costs and benefits is the first step. This
involves the specification of the costs and benefit variables for which data should be
collected, identification of the sources of information, collection of the same and then
assessment of the quality and reliability of the collected information.

Objectives and the Identification of Costs and Benefits

The costs and benefits of a project depend on the objectives the project wants to
achieve. So, the objectives of the analysis provide the standard against which cost and

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benefits are defined. A cost is anything that reduces an objective, and a benefit is
anything that contributes to an objective. But the stakeholders of a project has many
and different objectives & there is no formal analytical technique that could possibly
take into account all the various objectives of every participant in a project. Therefore,
take common objectives.

For a farmer, a major objective may be to maximize family income, avoiding risk and
continue producing a variety: But for a private business firm the main objective might
be increasing profit, or larger market share and hence large revenue while government
and the society at large will have as a major objective of increasing national income,
income distribution to increase the number of productive job opportunities so
that unemployment may be reduced, increase the proportion of saving for future
investment. Or there may be other broader objectives such as increasing regional
integration, raising the level of education, improve rural health, or safeguard
national security.

No formal analytical technique could possibly take into account all the various
objectives of every participant in a project. Some selection will have to be made. Most
often the maximization of income is taken as the dominant objective of the firm
because the single most important objective of an individual economic agent is to
increase income and increased national income is the most important objective of
national economic policy. Anything that reduces national income is a cost and anything
that increases national income is a benefit. Thus anything that directly reduces the total
final goods and services is obviously a cost, and anything that directly increases them is
a benefit.
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The task of the economic analyst will be to estimate the amount of the increase in
national income available to the society i.e., to determine whether, and by how much,
the benefits exceed the cots in terms of national income.
2.3 Classifications of Costs and Benefits
There are alternative ways of classifying costs and benefits of a project. One is to
categorize both costs and benefits into:
 Tangible and
 Intangible once.
Another classification is in terms of:

1. Total investment costs including:

Initial investment costs;
** Fixed investment costs;
** Pre-Production expenditures;
Investment required during plant operation / rehabilitation and replacement
investment costs/
Net working capital
2. Operating costs/costs of goods sold
Tangible and intangible costs of a project

Tangible costs of a project

In almost all project analyses costs are easier to identify (and value) than benefits. In
examining costs the basic question is whether the item reduces the net benefit of a
farm or the net income of a firm.

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The prices that the project actually pays for inputs are the appropriate prices to use to
estimate the project’s financial costs. Some of the project costs are tangible and
quantifiable while many more are intangible and non-quantifiable.

The costs of a project depend on the exact project formulation, location, resource
availability, or objective of the project. In general, the cost of a project would be the
sum of the total outlays; these include:

1. Total Investment costs

a. Initial Fixed Investment costs

The initial fixed investments constitute the major resources required for
constructing and equipping an investment project. These include the
following tangible initial fixed investments.
 The cost of land and site development such as land charges, payment for
lease cost of leveling and development cost of laying approach roads and internal
roads, cost of gates and cost of tubes wells

 The cost of buildings and civil works which includes buildings for the main
plant and equipment’s and for auxiliary services (steam supply, workshops,
laboratory, water supply, etc.) ; warehouses and show rooms ; non-factory
buildings like guest house, canteens, residential quarters, staff rooms, silos, tanks,
wells, basins, etc.; garages and workshops and other civil engineering works

 Plant and machinery including cost of imported machinery which might

include the FOB value, shipping freight and insurance costs, import duty, clearing,

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loading, unloading, and transportation costs: Cost of local or indigenous machinery:

Cost of stores and spares : Foundation and installation charges.

 Miscellaneous fixed assets- expenses related to fixed assets such as furniture,

office machines, tools, equipment’s, vehicles, laboratory equipment’s, workshop
equipment’s.
B.Pre-production Expenditures
Another component of the initial investment cost which includes both tangible and
intangible costs is the pre-production expenditures. In every project, certain
expenditures are incurred prior to commercial production/ inauguration and
commencement of service delivery for public service rendering projects/.This includes
the following investment cost items.

Intangible assets; these assets represent expenditures which yield benefits extending
over a long time period. These include: Patents, licenses, lump sum payments for
technology, engineering fees, copy rights, and goodwill; Preparatory studies, like
feasibility studies, specific functional studies and investigations, consultant fees for
preparing studies, supervision costs, project management services, etc.

Preliminary expenses; these costs include preliminary establishment expenses,

(registration and formation expenses), legal fees.
Other Pre-operation expenses include: rents, taxes, trial runs, start-ups and
commissioning expenditures( raw materials and other inputs consumed immediately
before commercial operation); salaries, fringe benefits and social security contributions
of personnel engaged during the pre-production period; pre-production marketing
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costs, promotional expenses, creation of sales network, etc; training costs, including
all fees, travel, living expenses etc; interest and commitment charges on borrowings,
Insurance charges and mortgage expenses interest on differed payments, and other
miscellaneous expenses.
II. Investment required during plant operation / rehabilitation and

replacement investment costs/

Every machinery and equipment does not have equal economic life. There are
machineries and equipment that productively be operated for many years, 20 years in
the case of industrial technologies, about 50 years in the case of agricultural and
infrastructural works. On the other hand there are equipment’s, machinery
components and parts which need to be regularly replaced for smooth operation of the
same technology. So sound project planning work should adequately provide for
replacement of components and parts. In fact the first thing to do would be to identify
such items and then estimate the costs for replacement and then the same should be
reflected in the financial and economic analysis.

III. Terminal Values/End-of-Life Costs/Salvage Cost Exit is not free

and perfect!!
Though firms may be institutionally organized to live and operate for unlimited period
of time and hence unlimited age, technologies, machineries and equipment do have
limited operational/economic/ life. During the end of the economic life of a
good/machinery, equipment, building, etc there is some salvaged value and the
salvation may involve incurring of costs. The costs associated with the
decommissioning of fixed assets at the end of the project life, minus any revenues from
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the sale of the assets, are end-of-life costs. Major costs are the costs of dismantling,
disposal and land reclamation.

IV.Net Working Capital

Net working capital is part of the total investment outlays. It is defined to embrace
current assets (the sum of inventories, marketable securities, prepaid items,
accounts, receivable and cash) minus current liabilities (accounts payable). This
investment is required for financing the operation of the plant. Any change in the
current assets and/or current liabilities will have an impact on the net working capital
requirements. Any increase in net working capital/NWC/ corresponds to a cash
outflow to be financed, and any decrease would set free financial resources (cash
inflow for the project).
Working capital is generally categorized into gross working capital and net working
capital (NWC).
The gross working capital consists of all the current assets, including:-raw
materials, stores and spares, work-in-process, finished goods inventory,
debtors/accounts receivable/, Cash and bank balance.
Net working capital is defined as gross working capital less current
liabilities. Current liabilities consist of creditors, provisions, accrued expenses, and
short-term borrowings. For the purpose of financial analysis and even financial
management of operational firms, it is net working capital which is the center of
decision makers.

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2. Operating costs / Costs of Goods Sold

Once the project idea has been accepted and the project is being implemented the
cost of production may be worked out: the following may be necessary:

Material cost - comprises the cost of raw materials, chemicals, components,

material for the construction of homes, etc. It is not the identification that is difficult in
this case but the problem of finding out how much is needed from each.

Utilities consisting of power, water, and fuel are also important cost components.

Labor: this is the cost of all manpower employed in the enterprise. It will not be
difficult to identify and quantify the labor required for the production process. From
the highly skilled manager to the unskilled factory worker the labor input can easily be
identified. Problems in the case of valuing unskilled labor and family labor might arise
in the economic analysis of projects.

Factory Overhead: the expense on repairs and maintenance, rent, taxes, insurance
on factory assets, etc. are collectively referred to as factory overheads.

Land to be used for the project can also be easily identified and quantified. It will not
be difficult to know who much land is need and about the location. Yet problems
might arise in valuing land because of the special kind of market conditions that exist
when land is transferred from one owner to another.

Contingency allowances are usually included as a regular part of the project cost.
In general project costs estimates assume that there will be no relative changes in
domestic or international prices and no inflation during the investment period or there

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will not be any modification in design, no exceptional conditions such as unanticipated

environmental conditions (flood, landslides, or bad weather).

It would be unrealistic to base project cost estimates only on these

assumptions of perfect knowledge and complete price stability. Sound
project planning requires that provision be made in advance for possibleadverse
changes in physical conditions or prices that would add to the baseline cost.
Contingency allowances may be divided into those that provide for physical
contingencies and those for price contingencies. In turn price contingencies
comprise two categories, those for relative changes in price and those for general
inflation.
Physical contingency allowances and price contingency allowances for relative changes
in price are expected and form part of the cost base when measures of project worth
are calculated. To avoid the problem of inflation on the other hand it is advisable to
work with constant prices instead of current prices. This approach assumes that all
prices will be affected equally by any rise in the general price level.

Taxes: payment of taxes including tariffs and duties is treated as a cost to the project
implementer in financial analysis. But they are considered as transfer payments in
economic analysis.

Debt service: the same approach applies to debt service - the payment of interest and
the repayment of capital. Both are treated as an outflow in financial analysis. In
economic analysis debt service is treated as a transfer payment within the economy

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even if the project will actually be financed by a foreign loan and debt service will be
paid abroad.
Sunk costs: are those incurred in the past and upon which the proposed new
investment will be based. Such costs cannot be avoided however, poorly advised they
may have been. When we analyze a proposed investment, we consider only future
returns to future costs; expenditures in the past or sunk costs do not appear in our
account.
Intangible costs of a project:

A project may displace workers, increase disease incidence, increase income inequality,
and destroy/reduce the scenic beauty of an area. Such costs are often not reflected in
the market price.
Tangible and intangible Benefits
Tangible benefits can arise either from increased production or from reduced costs.
The specific forms, in which tangible benefits appear, however, are not always obvious
and valuing them might be difficult. In general the following benefits can be expected.
 Increased production
 Quality improvement
 Changes in time of sale changes in location of sale
 Changes in product form (grading and processing)
 Cost reduction through technological advancement
 Reduced transport costs
 Loses avoided
 Other kinds of tangible benefits

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Note that investment projects generate intangible or indirect benefits such as decrease
unemployment, national integration (workers association), improving health and
nutrition status of workers and other positive externalities.

Quantification: once costs and benefits are enumerated the next step is accurate
prediction of the future benefits and costs which then be quantified in
monetary units/Birr/.Thus, quantification involves the quantitative assessment of
both physical quantities and prices over the life span of the project.

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2.3 The valuation of financial costs and benefits

This is an issue of pricing/valuing/ of the project’s inputs and outputs.The inputs and
outputs of a project appear in physical form and prices are used to express them in
value terms in order to obtain common denominator. For the purpose of the feasibility
study, prices should reflect the real economic values of project inputs and outputs for
the entire planning horizon of the decision makers.

The financial benefits of a project are the revenues received and the financial costs are
the expenditures that are actually incurred.In financial analysis, all these receipts and
expenditures are valued as they appear in the financial balance sheet of the project, and
are therefore, measured in market prices. Market prices are just the prices in the
local economy, and include all applicable taxes, tariffs, trade mark-ups and
commissions.

Since the project implementers will have to pay market prices for the inputs and will
receive market prices for the outputs they produce, the financial costs and benefits of
the project are measured in these market prices.
The financial benefit from a project is measured in terms of the market value of the
project’s output, net of any sales taxes.
Prices may be defined in various ways, depending on whether they are:
1. Market/explicit/ or shadow/imputed/ prices;
2. Absolute or relative prices;
3. Current or constant prices.

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Market/Shadow prices:
Market or explicit prices are those present in the market, no matter whether they are
determined by supply and demand or by the government. They are the prices at which
the firm will buy the inputs and sell the outputs. In financial analysis market prices are
applied. In economic analysis we raise the question whether market prices reflect real
economic value of project inputs and outputs.

In economic analysis, if the market prices are distorted, then shadow or imputed prices
will have to be used for economic analysis.
Absolute/relative prices:
Absolute prices- reflect the value of a single product in an absolute amount of
money
Relative prices- express the value of one product in terms of another.For instance,
the absolute price of 1 tone of coal may be 100 monetary units and an equivalent
quantity of oil may be 300 monetary units.In this case the relative price of coal in
terms of oil would be0.33, meaning that the relative price of oil is three times theprice
of coal.
The level of absolute prices may vary over the lifetime of theproject because of
inflation or productivity changes. This variation does not necessarily lead to a change in
relativeprices. In other words, relative prices may sometimes remainunchanged
despite variations in absolute prices. Both absolute and relative prices can be used in
financialanalysis.

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Constant Vs Current prices

Current and constant prices differ over time due to inflation, which is understood as
a general rise of a price levels in an economy. If inflation has a significant impact on
project inputs and output prices, such an impact must be dealt with in the financial
analysis. Wherever relative input and output prices remain stable, it is sufficiently
accurate to compute the profitability or yield of an investment at constant prices. Only
when relative prices change and project input prices grow faster (or slower) than
output prices, or vice versa, then the corresponding impacts on net cash flows and
profits must be included in the financial analysis. If inflation impacts are negligible, the
problem of choosing between current and constant prices does not exist, since they are
equal and the planner may use either.
2.4 The Treatment of Transfer Payments in Financial Analysis
Some entries in financial accounts represent shifts in claims to goods and services from
one entity in the society to another and do not reflect changes in national income. So
the definition of costs and benefits might be confusing. These payments are called
direct transfer payments.

Taxes: are those representing a diversion of net benefit to the society. A tax does not
represent real resource flow; it represents only the transfer of a claim to real resource
flows. In financial analysis a tax is clearly a cost. When a firm pays taxes its net income
reduces. But the payment of taxes does not reduce national income. Rather it transfer
income from the firm to the government so that this income can be used for social
purposes presumed to be more important to the society than the increased individual

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consumption (or investment) had the firm retained the amount of the tax. So, in
economic analysis taxes will not be treated as a cost in project account.

Subsidies: are simply direct transfer payments that flow in the opposite direction
from taxes. Direct subsidies represent the transfer of a claim to real resources from
one enterprise, sector or individual to another. Subsidies may be open or disguised
and are provided on the input or output side. On the input side subsidies reduce
costs to the project, e.g. subsidies to fertilizers. If the subsidy is granted on the output
side i.e., increase the revenue of the project; we should deduct the amount of the
subsidy from the revenue that includes subsidy. If a firm is able to purchase an input at
a subsidized price that will reduce his costs and thereby increase his net benefit, but the
cost of the input in the use of the society’s real resources remains the same. The
resources needed to produce the input or to import it from abroad reduce the national
income available to the society. Hence, for economic analysis of a project we must
enter the full cost of the input.

Again it makes no difference what form the subsidy takes. One form is that which
lowers the selling price of the input below what otherwise would be their market price.
But a subsidy can also operate to increase the amount the owner receives for what he
sells in the market, as in the case of a direct subsidy paid by the government that is
added to what the he receives in the market. A more common means to achieve the
same result does not involve direct subsidy. The market price may be maintained at a
level higher than it otherwise would be by; say levying an import duty on competing
imports or forbidding competing imports altogether. Although it is not a direct subsidy,

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the difference between the competing imports that would prevail without such
measure does represent an indirect transfer from the consumer to the producer.
Credit Transactions: these are the other major form of direct transfer payments.
A loan represents the transfer of a claim to real resources from the lender to the
borrower. When the borrower repays loans or pays interest he is transferring the claim
to the real resource back to the lender - but neither the loan nor the repayment
represent in itself, use of the resources.

From the standpoint of the producer, receipt of a loan increases the production
resources he has available; payment of interest and repayment of principle reduces
them. But from the standpoint of the national economy loans do not reduce the
national income available. It merely transfers the control over resources from the
lender to the borrower. The loan transaction from one enterprise to another would
not reduce the national income; it is rather, a direct transfer payment. Repayment of a
loan is also a direct transfer payment.
2.6 Means of finance (Project financing)
After identifying, projecting and estimating the cost of the proposed project, the next
step is to identify means or sources of financing the project. It contains the sources of
funds and the packages, comparing it in terms of interest rate, repayment period, grace
period etc.
The major sources of finances are:
a) Capital (Equity) Financing:
One way of financing the project is by issuing equity. Equity Capital refers to invested
money that is not repaid to the investors in the normal course of business. It represents

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the risk capital staked by the owners through the purchase of a company's common
stock or ordinary shares. Equity and long term investment are often used to cover the
initial capital investment for an industrial project and to meet working capital
requirements. When institutional capital is scarce and cost of borrowing is very high,
equity capital covers the initial capital investment and working capital requirement.

b) Loan (debt) financing:

Another way of financing the project is through external sources, i.e., debt financing
by getting loans from financial institutions. It is relatively easy for a sound project and
good financial analysis and source identifications to get loans from financial institutions.
They can be short, medium and long term loans. The long term loans are usually
subjected to certain regulations (convertibility to share). It can be government-to-
government level. This can be a bilateral credit or tied credit, which may be related to
the purchase of machinery and equipment from particular country or sources.

c) Suppliers credit (credit financing):

Imported machinery and spares can often be financed on deferred credit term.
Machinery suppliers are usually willing to sell machinery on deferred payments mode.
This means, payment for the purchase ofplants and machinery can be made over a
period of time.
d) Incentive Sources:
The government and its agencies may provide financial support as an incentive to
certain types of projects or for setting up industrial units in certain location or in the
form of operating capital. e.g., Seed and capital subsidy for farmers

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e) Debenture capital:
Akin to promissory notes, they are an instrumentto raise fund (debt financing). They
are a type of debt instrument that is not secured by physical assets or collateral. They
are backed only by the general creditworthiness and reputation of the issuer. These are
two types,
Non-convertible debenture: these are debt instruments which will be redeemed
at the date of maturity. They pay a fixed amount of interest and usually have 5 to 10
years of maturity.

Convertible debenture: these are partly or entirely convertible into a certain

amount of equity (share) after certain period of time.

2.7 Cash Flows in Financial Analysis

The three basic steps in determining whether a project is worthwhile or not are: (a)
estimate project cash flows; (b) establish the cost of capital; and (c) apply a suitable
decision or appraisal rule or criterion. This section deals with the first step.

Investment is a long-term commitment of economic resources made with the objective

of producing and obtaining net gains in the future. A capital project generally involves
current and ‘near future’ sacrifices made in the expectations of a flow of benefits
extending over a period of time. From the financial point of view the
sacrifice/commitment/ are in the form of cash outflows, and benefits are in the form
of cash inflows measured in post-tax terms. The task at hand is to evaluate and
determine whether the long-term investment is a profitable one or not.

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To this effect, what conventions of accounting and methods should one use? The
information contained in the conventional net income statement and the balance sheets
are not sufficient to address the question at hand. This solved by introducing what is
referred to ‚Cash – Flow Analysis‛. In view of addressing the major issues and tasks in
financial analysis (for that matter economic analysis as well), one needs to develop
certain mechanism of presentation, a mechanism that captures all the relevant data and
enables for easier computation to decide whether a project is a viable one or not.

Cash flows are basically either receipts of cash (cash inflows) or payments (cash
outflows) related to the long-term investment. Measurement of costs and benefits in
terms of cash flows is quite rational and appropriate as money has time value – cash
flows are more relevant than costs defined by conventional accounting and likewise
cash inflows are more relevant than earnings measured by conventional accounting.

Whether one is calculating financial or economic rate of return, a key part of the
analysis will be to work out the actual flows of income and expenditure. The financial
cash flow of a project is the stream of financial costs and benefits, or expenditures and
receipts that will be generated by the project over its economic life, and will not be
produced in its absence. Note that when one is working with market prices, the cash
flow stream is referred to as financial Cash Flow. When these prices are adjusted to
reflect national efficiency and equity objective (i.e. when shadow prices are used)
it is referred to as Economic Net Benefit Stream and Social Net Benefit Stream,
respectively.

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Components of the Cash Flow Stream

The cash flow stream associated with a project may be divided into three basic
components:
i. The initial investment represents the relevant cash flow when the project is set
up. It basically covers capital expenditure (such as plant and machinery)
ii. The operating cash inflows are the cash inflows that arise from the operation of
the project during its economic life. It covers maintenance, administration, and
managerial charges.
iii. The terminal cash flow is the relevant cash flow occurring at the end of the
project life on account of liquidation of the project. It deals with the salvage value of
the project.

Basic Principles for Measuring Project cash Flow

For developing the stream of financial costs and benefits, the following principles may
be kept in mind:
Project cash flow for year t = cash flow for the firm with the project for year t - cash
flow for the firm without project for year t.
In estimating the incremental cash flow of a project the following guideline may be
considered
 All incidental effects: In addition to the direct cash flows of the project, all
indirect flows on the rest of the firm must be considered. For eg: The project may
enhance the productivity of some of the existing activities (complementary Effect).
Or it may distract the profitability of some of the existing activity ( competitive
effect)
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 Ignore sunk costs: These are an outlay already incurred in the past or already
committed irrevocably. So, these costs will not be affected by the acceptance and
rejection of the proposed project.
 Include opportunity costs: If the organization uses resources already available
within the company, their cost in the form of opportunity cost has to be included as
they could be put in alternative uses.
 Question the allocation of overhead costs: Costs which are indirectly related
to the project (production) are called overhead costs and they should be considered
in the estimation of the project cash flow
 Estimate working capital properly: Working capital like current asset, loans
and advances should be properly estimated and indicated in the project cash flow.
Bear in mind that the requirements of working capital may be changed overtime as
the output of the project changes.
Drawback-it is only applicable for a firm having established investment.
Biases in Cash Flow Estimation
As cash flows have to be forecast far into the future, errors in estimation are bound to
occur. Yet given the critical importance of cash flow forecasts in project evaluation,
adequate care should be taken to guard against certain biases, which may lead to over
statement or understatement of true project profitability.

Overstatement of Profitability (Optimistic bias)

Profitability is often overstated because the initial investment is under -estimated and
the operating cash flow exaggerated. The principal reasons for such optimistic bias

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appear to be as follows:
Intentional overstatement: project sponsors may intentionally over-estimate the
benefits and under-estimate the costs.
Lack of experience: inadequate experience on the part of project sponsors
generally leads to over-optimistic tendencies. Inexperience on the other hand may
lead to wishful thinking.
Lack of objectivity: (subjective evaluation of every component) individuals
responsible for preparing forecasts may become too involved and lose their sense of
proportion unintentionally.
Capital rationing: companies typically operate under capital rationing which may
be externally determined or internally imposed.

Under-Statement of profitability (pessimistic bias)

This is an opposite kind of bias relating to the terminal benefit which may depress a
project’s true profitability. This can happen if:
 Salvage
values are under-estimated

Intangible benefits are ignored
 The
value of the future options is overlooked.

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2. Investment Profitability Analyses

Once the project preparation activity is completed the next step will be to select the
project on the basis of different criteria. There are several criteria that can be
employed to judge the worthiness of the project. Some are general and applicable to a
wide range of investments, whereas others are specialized and suitable for certain types
of investments and industries.

The important selection criteria are classified into two broad categories. These are
undiscounted measures and discounted measures.
1. Non-discounting (traditional) criteria
a) Payback Period (PBP)
b) Accounting Rate of Return (ARR)
2. Discounted Cash Flows (DCF) criteria
a) Net
Present Value (NPV)
b) Internal
Rate of Return (IRR)
c) Profitab
ility Index (Benefit-cost ratio)
2.1. Non-Discounted Measures of Project Worth

1) Payback Period
(PBP)

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Payback period refers to the length of time it takes to recover initial investment of the
project. Depending on the nature of net cash flows, payback period may be computed
in two ways.
a) When cash flow is in annuity form

Annuity refers to equal amount of cash flows that occur every period over the life
of the project.

Initial Investment
PBP =
Annual Net Cash Flows

To illustrate the computation of payback period, assume that a project requires an

initial investment of Br. 24,000 and annual after tax cash flows of Br. 6000 for five
years. How long it takes the company to recover its initial investment?

24,000
PBP = = 4 years
6000

It is expected to take the company four years to recover the project’s initial investment
of Br. 24,000
b) When cash flows are not in annuity form
When net cash flows are not annuity, payback period is obtained by adding net cash
flows for successful years until the total is equal to initial investment.

 PBP= Years before full recovery + Un recovered cost

Cash flow during the next year

To exemplify, assume that a project requires an initial investment of Br. 60,000. The after taxes
cash flows (or net cash flows) are as follows:

Year 1 = 8000 Year 3 = 22,000 Year 5 = 20,000

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Year 2 = 15,000 Year 4 = 20,000

The payback period is computed as follows:

15,000
PBP = 3 years + = 3.75 years
20,000

In the above example, if the 1st three years’ net cash flows are added, the sum is equal to Br.
45,000. But the initial investment is Br. 60,000. If the fourth year net cash flows (Br. 20,000) is
added to Br. 45,000, the sum is Br. 65,000 which is greater than the initial investment. Thus, the
payback period is between year 3 and year 4. To find the exact payback period, we take the three
years and divide the remaining cash flows by the fourth year net cash flows. If the exact payback
period is needed in months the fraction can be computed as follows:

15,000
PBP = 3 years + (12 months)
20,000

= 3 years and 9 months

Decision Rule for Payback Period

i. Accept the project if its payback period is less than or equal to the required payback period
(standard)

ii. Reject the project if its payback period exceeds the required payback period. The shorter the
payback period, the more desirable the project.

Advantages of Payback Period

1. It is simple both in concept and application

2. It is a rough and ready made method for dealing with risk

3. It may be a sensible criterion when the firm is pressed with problems of liquidity

Disadvantages of Payback Period

1. It fails to consider time value of money

2. It ignores cash flows beyond the payback period

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3. It is a measure of the project’s capital recovery, not profitability.

4. It does not indicate the liquidity position of the firm as a whole.

2) Accounting Rate of Return (ARR)

Also called the average rate of return on investment, the accounting rate of return is a
measure of profitability which relates net income to investment. Both net income and
investment are measured in accounting terms. Although there are several methods of
computing ARR, the most common method is shown below:
Average annual net income
ARR =
Average investment

Original cos ts  salvage value

Average Investment =
2

To illustrate, assume that a project has original investment of Br. 70,000, life of 4 years, and
salvage value of Br. 6000. Straight-line method of depreciation is used. Income before depreciation
and taxes for each of the four years are as follows: year1, Br. 40,000; year 2, Br. 42,000; year 3,
Br. 36,000; and year 4, Br. 50,000. Income tax rate is 40%.

Depreciation = 70,000 – 6000 = 16,000

4
Before ARR is determined, it is necessary to compute net income for each of the four years as follows:

Year 1 Year 2 Year 3 Year 4

Income before depreciation tax 40,000 42,000 36,000 50,000

Less: Depreciation 16,000 16,000 16,000 16,000

Income before taxes 24,000 26,000 20,000 34,000

Less: Taxes (40%) 9600 10,400 8000 13,600

Net income 14,400 15,600 12,000 20,400

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14,400  15,600  12,000  20,400

Average Net income =  15,600
4

70 ,000  6000
Average Investment =  38,000
2

Average Annual Net Income

ARR =
Average Investment

15600
=  41 %
38000

Decision Rule for Accounting Rate of Return

i. Accept the project if ARR exceeds the required rate of return.

ii. Reject the project if ARR is less than the required rate of return.

Advantages of ARR

1. It is simple to calculate

2. It is based on accounting information, which is readily available and familiar to businessmen.

3. It considers benefits over the entire life of the project.

4. It facilitates post-auditing of capital expenditures.

Limitations of ARR

1. It is based upon accounting profit, not cash flow.

2. It does not take into account the time value of money.

3. Since there are numerous measures of accounting rate of return, this may create controversy,
confusion, and problems in interpretation.

4. Accounting income is not uniquely defined because it is influenced by various methods, such
as depreciation methods, inventory costing method etc.
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2.2 Discounting techniques

1)Net Present Value Method
The net present value of project is the difference between the present value of net cash
inflows and present value of initial investment. In formula,
n
C
NPV =  t
 I0
i 1 1  r t
Where:
NPV = Net present value Ct = Net cash flows at the end of year t
n = Life of the project r = Discount rate I0 = Initial investment
Net present value can also be determined as follows:
NPV = PV of NCF – I0
Where: PV = Present value and NCF = Net cash flows

To illustrate, assume that a project is expected to have initial investment and life of Br. 40,000 and
five years respectively. The annual after tax net cash flow is estimated at Br. 12,000 for each of the
five years. The required rate of return is 10%. Net present value is determined as follows:

NPV = PV of NCF – I0

 1 
1  
= 12,000 
1  0.105   40,000
0.10 
 
 

= 12,000 (3.791) – 40,000

= 45,492 – 40,000 = 5492

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1
1
In the above formula, 1  0.10 5 represents the discount factor and its value is equal
0.10

to 3.791. This discount factor can be taken from the present value of annuity of 1 table
from the intersection of i = 10% and n = 5. It can also be determined using your
calculator.

In the above example, net cash flows are annuity. The same procedure can be followed
if net cash flows are not in annuity form. To illustrate the computation of NPV when
net cash flows are not annuity, suppose the project has initial investment and useful life
of Br. 30,000 and four years respectively. Its annual cash flows are as follows: Year 1,
Br. 10000; Year 2, Br. 8000; year 3, Br. 15000; and year 4, Br. 12,000. If the
required rate of return is 10%, NPV is determined as follows:

Year Net cash flows Discount factor (10%) Present value

1 10,000 0.909 9090

2 8000 0.826 6608

3 15,000 0.751 11,265

4 12,000 0.683 8196

Present value of NCF 35,159

Less: Initial investment 30,000

NPV + 5159

What does NPV represent? NPV represents the amount by which the value of (wealth of) the firm will
increase if the project is accepted.

Decision Rule for NPV

1. If NPV is greater than zero (NPV > 0), the project is considered desirable.

2. If NPV is less than 0, the project is considered undesirable.

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2. Internal Rate of Return (IRR)

Internal Rate of Return is the discount rate which equates the project NPV equal to zero. It is the
discount rate at which the present value of Net cash flows is equal to the present value of initial
investment. In other words, IRR is the rate of return on investments in the project. The
determination of IRR is purely based on project cash flows. Mathematically, at IRR,
n
Ct

i 1 (1  r ) t
= Initial investment

IRR is determined using trial and error: the complexity of determining IRR is greater if net cash
flows are not in annuity form. This section illustrates the determination of net cash flows when cash
flows are annuity as well as non-annuity.
a) Determination IRR when NCFs are annuity.
Assume that the project has initial investment of Br. 40,000, and useful life of five years. the annual
net cash flows is estimated at Br. 12000 for five years. The required rate of return is 10%. The
following steps can be followed to determine IRR.
Step1: Compute the leading discount factor (payback period)
Initial Investment 40,000
PBP =  = 3.333
Annual net cash flows 12,000

Step 2. From the present value of annuity table, find two discount factors and their corresponding
interest rates closest to the computed leading discount factor. If we look in the PV of annuity table
on n = 5 years row (horizontally), the leading discount factor (3.333) is found between 15% and
16%.
Interest rate 15% 16%
Discount factor 3.352 3.274
Step 3: Compute the actual IRR using the following formula
 PBP  DFr 
IRR = r –  
 DFrL  DFrH 

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Where:
r = either of the two interest rates (15% or 16%) DFr = Discount factor for the taken interest rate
DFrL = Discount factor for the lower interest rate DFrH = Discount factor for the higher interest rate
Let's take r = 15%, IRR is determined as follows:
3.333  3.352 
IRR = 15% -  
 3.352  3.274 
= 15% - (-0.24)
= 15.24%
If we take r = 16%, the computation of IRR looks like the following:
 3.333  3.274 
 
IRR = 16% -  3.352  3.274 
= 15.24%
Decision Rule for IRR

 Accept: If the IRR is greater than the discount rate

 Reject: If the IRR is less than the discount rate
3. Profitability Index (PI)
The profitability index, also called benefit - cost ratio, is the ratio of the present value
of net cash flows and initial investment.
Pr esent value of NCF
PI =
Initial investment
To illustrate, assume that a project is expected to have initial investment and useful life of Br.
90,000 and four years respectively. Annual net cash flows amounted to Br. 40,000. The discount
rate is 10%. Profitability index can be computed as follow:
Pr esent value of NCF
PI =
Initial investment
40,000(3.170)
= =1.41
90,000
Decision rule for profitability Index
ii. Accept if the project's profitability index is greater than 1
iii.Reject if the project's profitability index is less than 1

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2.6. Sensitivity Analysis

Another method popularly used for analysis of risk is what is called sensitivity analysis.
This consists varying key parameters (individually or in a combination) and assessing
the impact of such changes or manipulation on the project’s net present value.
It consists of testing the sensitivity of the NPV or IRR to changes of basic variables and
parameters that enter the project’s input and output streams. The common practice is
to vary them by fixed percentage such as 10%.

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CHAPTER THREE: ECONOMICANALYSIS OF PROJECTS

In financial analysis, the analyst is concerned with theprofitability of the project from
an individual point of view (firm’s profitability). The main objective here is to
maximize the income of the firm or to analyze the budgetary impacts.

The financial analysis is done by applying market prices. In economic analysis, the
objective is to maximize national income no matter who receives it. But financial
analysis will rarely measure a project’s contribution to the community’s welfare.Thus,
the project analyst must not only be sure that a proposed project will be profitable
enough to attract investment interest but also that the project will contribute
sufficiently to the growth of national income.

The starting point for the economic analysis is the financial prices. They are adjusted as
needed to reflect the value to the society as a whole of both the inputs and outputs of
the project.
3.1The Rationale for Economic Analysis

The objective of any legitimate government is promotion of community welfare.

Governments are more concerned with their public work programs to promote
community welfare than they merely maximize financial profits at distorted local
prices. Prices could be distorted because of failures of markets, the absence of perfect
knowledge, and the existence of externalities, consumer and producers surplus,
government and public goods, etc.

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As a result, it is not possible to use market prices to assess the economic worth of
projects. So, governments must choose projects on the basis of an economic analysis if
they wish to promote the community’s welfare.

The major conditions under which it is impossible to usemarket prices to assess the
economic worth of projects can begrouped under the following major headings:
1.Intervention in and failures of goods markets including the markets for
internationally traded goods.
2.Intervention in and failure of factor markets including the market for labor, capital,
and foreign exchange.
3.The existence of externalities, public goods and consumer and producers surplus.
4.Imperfect knowledge, which the neoclassical model assumes that consumers and
producers have full knowledge about all aspects of the economy relevant to their
choice of operations.
This is unrealistic because of poor transport andcommunication and low education
levels.

1. Government Interventions and/or Failure of Goods Markets

A. Failure of domestic goods markets

The true economic value of a good produced by a project, (marginal social benefit), is
in general measured by what people are willing to pay for that good.
Traditionally this is reflected by the market price of the commodity. But the market
price of that commodity will not measure what people are willing to pay for it unless
the following three conditions are met:

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1. There is no rationing of scales or price controls in the market for the good.
That is, QD must equal QS and the price of the good must be its competitive
demand price.
2. There is no consumer’s surplus from the consumption of the good.
 If people are willing to pay more than they actually have to pay for a project
output, then these market prices do not reflect the true value of the good
produced by the project.
3. There is no monopsony buyer who is large enough to force the project to sell its
output below the price that the monopsonist is really willing to pay.
Unless these conditions are met, the good’s market price will not reflect people’s
true willingness to pay for the good and will not be a good measure of the welfare
or utility that people will obtain from consuming the project’s output.
If any of these market imperfections exist, it will be necessary to use corrective
measures (shadow prices).
Alternatively, governments may enforce compulsory deliveries of goods and
services at artificially low controlled prices.
B.Trade protection and intervention in the markets for internationally traded

goods
Governments frequently intervene in import markets by imposing quotas and tariffs to
protect infant industries or activities that are internationally competitive. Tariffs and
quotas will cause a divergence between local market prices and the world prices of
internationally traded goods. The extent of this divergence may vary from industry to

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industry. An import quota will push the domestic market cost of the input well above
the foreign exchange cost to the economy of importing the input (world price). Such
import quota overvalues the social cost of the traded input used by the project.
2. Failures of/or Intervention in Factor Markets
The true economic cost to an economy of a project’s input, its marginal social cost,
will be measured by its economic opportunity cost to suppliers.
The market price of an input will equal to its opportunity cost of production if the
following conditions are met:
1) There are no rationing, price controls or taxes in factor markets, such as fixed
minimum wages, controlled interest rates, price controls on raw materials or taxes
on labor, savings and profits, raw materials, equipment or other project inputs.
2) There is no producer’s surplus in the market price of the input
3) There are no monopsony buyers who are in a position to force the factor’s market
price below their marginal revenue product and hence the price they would be
willing to pay for

A. Intervention in the market for labor

Labor markets are frequently regulated with fixed minimum wage rates or centrally
fixed wages rates for formal sector jobs. If these wage rates are set above the market
clearing levels, there is likely to open unemployment or disguised unemployment.
 This is particularly true for unskilled labor.

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 In the case of skilled labor, fixed wage rates may actually be set below market
clearing levels causing an artificial shortage of skilled labor.
 In such situations, wage rate may not reflect the true social cost of labor.
 Thus, a project analyst should adjust wage rates until they reflect the true social
cost of labor in the country, the shadow wage rate.
B. Intervention in/or failure of capital market
In order to encourage investment, interest rates are often kept low. The interest rate
paid for investible funds may be held well below the equilibrium interest rate. As more
people wish to borrow than to save at this low interest rate, there will be an excess
demand for capital funds. This will lead to ration the available credit to preferred
borrowers.
In addition government routinely tax both borrowers and lenders introducing further
distortions into the capital market. For these reasons, market interest rates should not
be used to discount future income streams in an economic analysis.
 The government will have to estimate the social discount rate that better reflects
the opportunity cost of using investible funds in a project.

C. Intervention in foreign exchange markets

Many countries often manage their foreign exchange rate. Often the exchange rate is
set significantly above its freemarket level in terms of say a US dollar per unit of
localcurrency. That is; overvaluation of local currency is a common practicein

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developing countries.Currency overvaluation creates an apparent shortage of

foreignexchange.
 This happens because at the overvalued exchange rate imports appear cheap
relative to locally produced goods unless tariffs are imposed, demand for imports
will rise.
 On the other hand currency overvaluation makes exporting as compared with
supplying the local market, financially unattractive to producers.
 This will result in excess demand for foreign exchange.In these circumstances,
the official exchange rate willunderstate the true value of foreign exchange to the
countryconcerned.
This is given by the shadow exchange rate, SER, the amountresidents are willing
to pay for the fixed quantity of foreignexchange available.

Use of the OER in project appraisal will have the effect ofundervaluing projects that
produce exportable outputs andovervaluing those that use imported inputs.
The overvaluation of the exchange rate must be corrected in aneconomic analysis.
One method of doing this is to employ a shadow exchange rateto convert
foreign prices into local currency.

3. Externalities and public Goods

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Another reason why the perfect world of neoclassical theory fails to represent the real
world is the existence of public goods and externalities. A financial analysis of a project
that uses or produces public goods and externalities fails to capture the full impact of a
project on the community’s welfare.
A. The existence of externalities
Externalities are created in the process of producing, distributing and consuming
many goods and services. There are positive or negative attributes or effects of a good
or service.Some costs and benefits do not appear among its inputs and outputs when it
is analyzed from the enterprises or individual’s viewpoint and thus do not enter into
the financial NPV and IRR.These items are considered as external to the enterprise but
are internal when they are considered from the economy’s angle.
Somebody pays for the external costs and someone receives these external benefits
even if this is not the enterprise.
B. The existence of public goods
Public goods are goods and services whose use by one persondoes not reduce their
availability to others.
That is; they are neither rival nor excludable. Example:urban road networks, TV and
radio signals, Disease eradication campaign, Defenseforces, and The legal system
Public goods are usually provided free by governments and ina financial analysis would
therefore, be priced at zero.

However, they do have a beneficial impact on the welfare of those receiving them,
most of whom will be willing to pay forsuch goods through taxation.But it costs the
society significant sum of money to produce many of the public goods. This is a case

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where the market price of a good or service will not reflect its true cost or benefit to
the society.
If the project uses public goods as inputs or produces them as outputs it would be
wrong to value them at their market price of zero in any economic analysis of the
project. They have to be valued at the amount that it is estimated people will be
willing to pay for them.
The Essential Elements of an Economic Analysis
The economic analysis of a project has many features in common with financial analysis.
These include:
1. Both involve the estimation of a project’s cost and benefits over the life of the
project for inclusion in the project’s cash flow.
2. In both, the cash flow is discounted to determine the project’s net present value,
or other measures of project worth
3. Both may also use sensitivity or probability analysis to assess the impact of
uncertainty on the project’s NPV.
But an economic analysis goes beyond a financial analysis. That is; the essential
elements of economic analysis include:
A. The elimination (deduction) of transfer payments within the economy from the
project’s cash flow. Examples:
Taxes-Personal and company income taxes, VAT, indirect taxes, excise and stamp
duties.
Subsidies ---- Including those given via price support schemes.
Tariffs on imports and exports subsidies and taxes .
Producer surplus - gains received by a supplier
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Credit transactions - loans received and repayment of Interest and principal.

B. The estimation of economic or shadow prices for project outputs and produced
inputs (including internationally traded and non-traded goods) to correct for any
distortionsin their market prices.
Since we use different prices, different economic and financial NPV and IRR are
obtained even if the inputs and outputs areidentical in physical terms.
C. The estimation of economic prices for non-produced project inputs (including labor,
natural resources and land)to correct for any distortions in their market prices.
D. The valuation and inclusion of any externalities createdby the project in economic
analysis
E. The valuation and inclusion of any un-priced outputs orinputs such as public goods
or social services.

3.3. Determining economic values

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Due to social, political, historical, and economic, etc reasons,markets are distorted.
As a result, the market prices are also distorted and do notreflect marginal
productivities and marginal utilities.Divergence between economic and market prices
could be dueto market failure, government interventions, externalities,public goods
and distributional considerations.

Hence serious distortions exist in the market for labor, capital, and foreign exchange
and efforts are necessary to replace thesignals from these markets by more appropriate
measures.
The key to understanding of economic analysis is the conceptof opportunity cost.The
opportunity cost is equal to the marginal value productand the market price of the item
in a relatively competitivemarket.
Economic pricing involves making adjustments to marketprices to correct for
distortions and to retake account ofconsumer and producers surplus.The adjusted price
should then reflect the true opportunity costof an input or people’s willingness to pay
for it.

So, we use Shadow Price which is also called the accountingprice.The shadow price is
what we call the economic price.
3.3.1. Adjustment for Transfer Payments
Transfer payments are defined as payments that are madewithout receiving any good
or service.They involve the transfer of claims over real resources fromone person or
entity in society to another, rather than paymentsmade for the use of or received from
the sale of any good orservice.So they do not reflect changes in the national
economy.Some examples of items that are considered as transferpayments are:
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A. Taxes - personal and company income taxes, value addedtaxes and other indirect
taxes, excise taxes stamp duties, etc.In financial analysis a tax is clearly a cost.
When an individual pays taxes his net benefit is reduced.But this payment does not
reduce national income.Rather it is transfer from the individual to the government
sothat the income can be used for social purposes that areimportant to the society.

Thus payments of taxes does not reduce national income, it isnot a cost from the
standpoint of the society as a whole.That is, taxes remain a part of the overall benefit
stream of theproject that contributes to the increase in national income.
B. Production Subsidies: are simply direct transfer paymentsthat flow in the
opposite direction from taxes. Subsidies do not increase or decrease national income.
It merely transfers control over resources from a taxpayer toanother individual.But,
subsidy increases the individual’s income, so it is revenuefor the receiver.
C. Credit Transactions: Loans received and payment of interestand capital when
these transactions occur between domesticborrower and lenders are examples of such
credit transactions.

The payment of interest and repayment of capital (debtservice) is treated as an outflow

in financial analysis buttreated as transfer payments and are omitted from
economicaccounts.

D. Charitable gift or welfare support services: are alsoconsidered as transfer

payments.
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E. Producer surplus- gains received by an existing supplier of afactor as a result of

an increase in the price of that factor.But in an economic analysis of a project, any
change inconsumer surplus as a result of the project should be includedin the project’s
economic cash flow, because these changesrepresent real effects on peoples welfare.
3.3.2. Efficiency or Economic shadow Prices
In economic analysis of projects, inputs and outputs should bevalued at their
contribution to the national economy, throughefficiency or shadow prices.

The application of shadow prices is based on the underlyingnotion of opportunity cost.

From the national economic point of view, it is the alternativeproduction foregone or
the cost of alternative supplies thatshould be used to value project inputs and outputs.
An economic or shadow price reflects the increase in welfareresulting from one more
unit of an output or input beingavailable.
Definition of shadow (accounting) prices
Accounting or shadow prices are simply a set of prices that arebelieved to better reflect
the opportunity cost, i.e. the cost intheir best use, of goods and services.
 It represents all none market prices.
 It is the value used in economic analysis for a cost or a benefit in a project when the
market price is left to be a poor estimate of economic value.
 It implies a price that has been derived from a complex mathematical model such
as linear programming.
 Efficiency shadow prices are border prices determined by international trade.
 The project inputs and outputs are thus valued on the basis ofinternational trade.

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The basic assumption here is that international market is less distorted than the
domestic market and thus taking international price is more realistic to value the true
cost of goods and services.
It is an estimate of efficiency prices.
Example: shadow wage rate set by estimating the marginal value product of labor.
So shadow prices are used instead of domestic market prices in guiding the allocation
of resources since the market prices are distorted and using them would lead to
resource misallocation.
In practice economic pricing involves making adjustments to market prices to correct
for distortions and to take account of consumer and producer surplus.
Shadow pricing and the numeraire

The implicit objective of project analysis when project items are valued at opportunity
cost is to maximize the net resources available to the economy.
For many project items the opportunity cost will be given directly by its border prices.
A numeraire is a unit of account. Shadow prices can be expressed in two ways:
a) Directly in foreign exchange units - valuing all project effects at world prices
termed as the world price numeraire.
b) In domestic price units using a domestic price numeraire.
The use of different numeraire to express opportunity costs will not affect the relative
value of project outputs and inputs.

Shadow price estimates can be made at two levels:

 Economic analysis

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 Social analysis
Distinction stems from the objectives pursued in project appraisal. In economic
analysis resource efficiency is also considered. In social analysis growth and income
distribution objectives are pursued.
3.3.3 Traded and Non Traded Goods
Goods and services produced by the project or that serves as projectinputs can be
classified as:Non-traded goods, Traded goods orPotentially traded goods.

Non-Traded Goods: Non-traded goods are goods that do not enter into the
internationaltrade because of their nature or physical characteristics.So the non-traded
inputs and outputs of a project cannot be valueddirectly at border or world
prices.Some also consider goods which do not enter into trade because
ofprotection(trade barriers).
Example:
 Electricity is only rarely transmitted across frontiers.
 Unskilled labor is also another example of non-traded commodity.

 Inland transportation and cement. Cement is usually considered as non-traded

goods. When goods do not enter into trade by their very nature decomposing is a
pre-requisite to their valuation in terms of world prices.

For some non-traded goods no reference border prices are available. Example: Teff. or
other commodities the local supply price is below the CIF(cost of insurance and freight)
[for imports] price of potential imports but above the FOB(free on board) [for exports]
price of potential exports.In both cases the non-traded inputs and outputs of the
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projectcannot be valued directly at border or world prices. So the valuation of non

traded goods at world prices consists of a number of steps:
A. Net out taxes from the domestic market price of thecommodity.
B. The net of taxes price is decomposed into its traded and nontradedcost elements.
For the traded components a border price is available by definition and they are
valued at this price.
The non -traded items are further decomposed into traded and non-traded and the
procedure continues until in successive rounds the original inputs or outputs is
developed into traded components and labor.
Example: consider the production of electricity from coal
Major cost elements are: Coal, transport of coal to its site, transmission costs, wages
andsalaries, etc.But this procedure is cumbersome if not difficult because itrequires
detailed production data and cost, which are not easilyavailable and time consuming.

Furthermore, the additional accuracy obtained in successiverounds of decomposition

will diminish fast. Thus one or two rounds of decomposition might be sufficient.
After one or two rounds the non-traded components will bevalued at the domestic
price and multiplied by a conversionfactor.

Traded components will be valued at border prices and labor atthe shadow wage rate.
If the output of a project is a non-traded good for which borderprices are however,
known and if its domestic supply price isbelow CIF but above the FOB, a convenient
approximation isto value it at the average of the two.
Traded Goods

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Traded goods are defined as goods and services whose use orproduction causes a
change in the country’s net import or exportposition.Traded goods produced or used
by a project do not actually need tobe imported or exported themselves, but must be
capable of beingimported or exported. Examples: All kinds of manufacturing, Most
agricultural goods, Intermediate goods, Raw materials and Some services such as
tourism and consultancy services.

Traded goods are either exportable or importable goods (orservices).Exportable goods

are those whose domestic cost of productionis below the FOB export price that local
producers can earnfor the good on the international market.Importable goods are
goods whose landed CIF import cost isless than the domestic cost of producing these
goods.
3.3.4. Border Parity Pricing
World prices are normally measured as border prices reflecting the value of a traded
good at the border or port of entry of a country.Border price is the unit price of a
traded good at a country’s border (FOB for exports and CIF for imports).

However, values in project financial statements will normally be at prices received by

the project - ex - factory or farm gate prices or paid by the project for inputs.To move
from market to shadow price analysis, shadow prices must be in terms of prices to the
project. This means that for traded goods domestic margins, relating to transport and
distribution (including port handling) will have to be added to prices at the border to
obtain values at the project level.

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The decomposition of these margins is referred to as borderparity pricing.A parity

price or parity economic value is the price or value ofa project input that is based on a
border price adjusted forexpenses between border and the project boundary.

Assessing the full economic values of a traded good in a worldprice system requires
both its foreign exchange worth at theborder, plus the value at world price of the non-
tradedactivities of transportation and distribution required per unit ofoutput.

Thus, for goods that are traded directly by a project, theborder parity price for the
project output is the FOB priceminus the value of transport and distribution.
Similarly where a project imports an input, its border parity priceis the CIF price plus
transport and distribution costs.
Potentially Traded Commodities

In some cases, the distortion in the trade regime is so great that they can actually
prevent the trade of goods that would otherwise be tradeables.

A potentially traded goods includes all those goods and services currently not traded by
a country but would be traded if it pursued optimum trade policies. These are goods
that would have been tradeables in theabsence of trade restrictions.Many countries
impose rigid import quotas, import embargos, prohibitive import tariffs or export
embargoes on at least some imports and exports.The group of potentially traded goods
falls between the traded and non-traded goods.

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Potentially Traded Input

When the price differential between importing and localsupply is substantial, the
project owner may ask thegovernment to import.Thus, if this is done, the input should
be treated as traded goodand be valued at the CIF price.
On the contrary, if the input is supplied by the local high costindustry, it should be
treated as a non-traded good.
Potentially Traded Outputs
If a project output is potentially importable but not imported atpresent because of high
import tariffs and if the duties orquotas are to be removed, the output should be
treated astraded.
If such removal cannot be foreseen, then it should be treated asa non-traded
commodity. The same principle applies to project outputs that could beexported if the
trade barriers were removed.
3.3.5 Standard Conversion Factors
It has been already stated that all project inputs and outputsshould be valued at the
world prices(border prices).World prices are used to measure the opportunity cost to
theeconomy of goods and services which can be bought and soldin the international
market.
However, in practice, there are significant number ofcommodities for which there will
be no direct world price touse as a measure of economic value.
Example: Teff

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These commodities fall under the general heading of non-tradedgoods.Even when non-
traded goods are decomposed there alwaysremain items that are non traded and for
which there is onlydomestic market.
Thus, some world price equivalent figure need to be derivedfor these non-traded
goods.To estimate the accounting prices for all other non tradedgoods (inputs and
outputs) we use conversion factors.A conversion factor is defined as the factor by
which wemultiply the actual price in the domestic market of an input oroutput to
arrive at its accounting price.
The conversion factor is simply the ratio of the shadow priceof the item to its market
price.A conversion factor is estimated simply by taking the ratio ofborder prices
(world prices) to domestic market prices of thegood.
Since market distortions vary from commodity to commodity,the conversion needed
varies from case to case.Therefore, it is possible to estimate commodity
specific,service specific, or sector specific like electricity,transportation, construction
etc., or for a basket of goods e.g.consumption goods for a particular income group
conversion
factors depending on the degree of aggregation desired.Thus conversion factors can be
calculated at different levels:
For individual commodities. E.g. coffee conversion factorFor broad sector example:
construction conversion factor, For categories of expenditure. Example investment
conversionfactorFor the economy as a whole example ACF.
In all cases one is comparing a value at world price, whichshould reflect the shadow
price, with the domestic price.In principle we should have one conversion factor for

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eachnon-traded commodity or for each group of commodities.Thus, the use of

conversion factor is only the second bestapproach.
The best approach is to use the accounting price.
Thus, for homogenous groups of goods and services it isconvenient to have readily
available conversion factors to beused in all project, instead of decomposing them
every time aproject is analyzed.

The question now is how many conversion factors do we need? There is no definite
answer to the question. It all depends on the data availability, the variations of market
distortions, the time it takes to estimate conversion factors ,etc. But at least we need
one conversion factor to multiply all the domestic market prices of all non-traded
components of the input and output of a project. This parameter is called the standard
conversion factor.

Standard conversion factor.is a summary measure to calculate accounting prices for

non traded commodities. In the case of Ethiopia, the standard conversion factor is
interpreted as a summary and approximate quantification of the distorted markets
(domestic) as compared to the international market.
Therefore, it is the ratio of the value of imports and exports of a country at border
prices to their value at domestic prices. The formula for computing the standard
conversion factor is give as:

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Where M and X are total imports and exports respectively at world prices converted
at the official exchange rate.
 Tm and Tx are the total trade taxes on imports and exports respectively
 Sm and Sx aretotal trade subsidies on imports and exports respectively
All values should refer to the same year or to an average over thesame period.
The SCF is a summary measure to calculate accounting prices fornon-traded
goods.This is achieved by multiplying the net of taxes domestic price ofthe commodity
by the SCF.The border price is obtained by multiplying the net of taxesdomestic price
of the commodity by the SCF.Thus, every effort must be made to decompose the non-
traded goodsinto traded and non-traded elements and apply the SCF only to thelatter.

The rule for the non-traded goods should be still decomposition andthe SCF should be
used only when this is impossible, very difficultor is not worth the effort.The SCF is
revised from time to time by the central economicauthorities and adopted by planning
bodies.
National Parameters
There are some important parameters that have general applicabilityin the sense that
they are used in all projects.These parameters should take the same value in all projects
althoughthey can change from time to time.That is; such parameters are national so
that they apply to allprojects regardless of their sector, and they are economic
becausethey reflect the shadow price of the items concerned.
For instance, a typical list of national economic parameters maycover conversion
factors for:
Unskilled and skilled labor
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Some of the main non-traded sectors

Some aggregate conversion factors such as consumption conversion factor, a
standard average conversion factor, the discount rate, etc.

A project analyst can apply these parameters directly to theproject under analysis.
They are called national parameters to distinguish them fromthe project specific
shadow prices.They are estimated by the central planners and are taken asgiven by the
project analyst.
Some of the important national parameters include:
The standard conversion factor
The shadow wage rate
The discount rate, and
The shadow exchange rate( SER= Pd/Pw)
 Pd- domestic price, Pw- world price in foreign currency

3.4. Social Cost Benefit Analysis

The Purpose of Social Cost Benefit Analysis
In financial and economic project appraisal, it is implicitlyassumed that income
distribution issues are beyond theconcern of the project analyst or that the distribution
ofincome in the country is considered appropriately. For a private commercial
entrepreneur project choice is arather simple exercise.

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If he/she knows his/her objectives, all he/she has to do is toascertain which projects
satisfy his/her objectives best.But in most countries, governments are not only
interested inincreasing efficiency but also in promoting greater equity.

A financial objective is narrow one for a public agency topursue and for public
decisions; a broader social objectivewould be more appropriate.
When a project is chosen from alternative projects, the choicehas consequences for
employment, output, consumption,savings, foreign exchange earnings, income
distribution andother things of relevance to national objectives.

The purpose of SCBA is to see whether these consequencestaken together are desirable
in the light of the objectives ofnational planning.Therefore, a social appraisal of
projects goes beyondeconomic and financial appraisal to determine which projectwill
increase welfare once distributional impact is considered.

The project analysts will not be only concerned to determinethe level of project’s
benefits and costs but who receives thebenefit and pays the costs.In an economic
analysis of a project, it is implicitly assumed that a dollar received by any individual
will increase the community’s welfare by the same amount as a dollar received by any
other individual. But an extra dollar given to a very poor person will usually increase
the person’s welfare by much more than would a dollar given to a rich person.

A rationale in welfare economics for the social analysis of projects is therefore, quite
strong, the marginal utility of income of a person who receives a low income is
expected to be greater than the marginal utility of income of the same person if he/she
receives a high income.
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Basic Arguments for the Application of Social Cost benefit

Analysis
The basic arguments include:
 Existence of market imperfection
 Existence of externalities
 Concern for savings
 Concern for redistribution
 Merit wants
3.5. Cost Effectiveness Analysis
Both cost - benefit analysis (CBA) and cost - effectiveness analysis (CEA) are useful
tools for program and project evaluation. Cost - effectiveness analysis is a technique
that relates the costs of a program/project to its key outcomes or benefits.
Cost - benefit analysis takes that process one step further, attempting to compare costs
with the dollar value of all (or most) of a program ’s many benefits.

These seemingly straightforward analyses can be applied anytimebefore, after, or

during a project/program implementation, and they can greatly assist decision makers
in assessing a project ’ s efficiency. However, the process of conducting a CBA or CEA
is much more complicated than it may sound from a summary description.

Cost - effectiveness analysis seeks to identify and placedollars on the costs of a

project.It then relates these costs to specific measures of projecteffectiveness.Analysts
can obtain a project ’ s cost - effectiveness (CE) ratioby dividing costs by what we term
units of effectiveness:

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Units of effectiveness are simply a measure of any quantifiableoutcome central to the

project’s objectives.For example, a dropout prevention program in a high school
would likely consider the number of dropouts prevented to bethe most important
outcome.For a policy mandating air bags in cars, the number of livessaved would be an
obvious unit of effectiveness.Using the formula just given and dividing costs by the
number of lives saved, you could calculate a cost -effectiveness ratio, interpreted as
“ dollars per life saved. ”
You could then compare this CE ratio to the CE ratios of othertransportation safety
policies to determine which policy costs lessper unit of outcome (in this case lives
saved).
Although it is typical to focus on one primary outcome in CEA, ananalyst could
compute cost - effectiveness ratios for other outcomesof interest as well.

Mutually exclusive programmes

 Incremental cost-effectiveness ratios =
ΔC = Cost of new treatment – cost of current treatment
ΔE Effect of new treatment – effect of current treatment
Steps in Cost - Effectiveness and Cost - Benefit Analysis
1. Set the framework for the analysis
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2. Decide whose costs and benefits should be recognized

3. Identify and categorize costs and benefits
4. Project costs and benefits over the life of the program, if applicable
5. Monetize (place a dollar value on) costs
6. Quantify benefits in terms of units of effectiveness (for CEA), or monetize
benefits (for CBA)
7. Discount costs and benefits to obtain present values
8. Compute a cost - effectiveness ratio (for CEA) or a net present value (for CBA)
9. Perform sensitivity analysis
10. Make a recommendation where appropriate

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CHAPTERFOUR: IMPLEMENTATION, MONITORINGANDEVALUATION

Introduction: MonitoringandEvaluation some basics
WecanthinkofM&Easapartofcontinuous:
• observation

• informationgathering

• supervision(control)

• Andassessment.

4.1 What is Monitoring?

• Monitoringrepresentsanon-goingactivitytotrackprojectprogressagainstplanned tasks.
• Monitoringimpliesobservingand controllingtheproject’sactivities.
• Assoonastheprojectislaunched,controlormonitoringbecomesthedominantconcern
oftheprojectmanagement.
Oncethekickoffphaseisover,planningandcontrolbecomescloselyintertwinedinan
integratedmanagerialprocess

4.2 TheNeedforMonitoringandEvaluation
TherearemanyreasonsforcarryingoutprojectM&E
• Projectmanagersandotherstakeholdersneedtoknowtowhatextenttheirprojectis
meetingitsobjectives
• M&Ebuildgreatertransparencyand accountabilityin termsofuseofprojectresources
• InformationgeneratedthroughM&Eprovideprojectstaffwithaclearerbasisfor decision-
making
• Futureprojectplanninganddevelopmentisimprovedwhenguidedbylessonslearned
fromprojectexperience
Thegoalofmonitoring
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• Toensurethattheimplementation isproceedingaspertheplan
• Toproviderecordsofinput use,activitiesand results
• TowarnofdeviationfromtheinitialobjectiveWith
 Thebudget,
 Timeand
 Thetasksdefinedintheapprovedprojectplan.
Thismustbedoneinanintegratedmanneratregularintervals,notinahaphazard, arbitraryway.

Anysignificantdeparturesfromthebudgetandtheschedulemustbereported immediately,

Thiswillhelptheprojectmanagertoadapt:theprojectschedule,thebudgetand/ortheworkpl
antokeepthe projectontrack.

Theprojectprogressandchangesmustbedocumentedandcommunicatedtothe
teammembersinaconsistent,reliableand appropriatemanner.

Whatshouldbemonitored?
• aregularcomparisonofperformanceagainsttarget

• Volumeofwork beingcompleted

• Qualityofworkbeingcompleted

• Costsandexpenditurescomparedtothe plan

• Attitudesofpeopleworkingon theprojectandotherswhoareinvolvedwith the

project,

• asearchforthe causeofdeviation

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• Cohesivenessandco-operationofteammembers

Whatmonitoringshouldaccomplish?

• Communicateprojectstatusandchangestootherprojectteammembers

• Informmanagement(andclients)aboutthestatus oftheproject

• Providethejustificationformakingprojectadjustments

• Documentcurrentplanscomparedtotheoriginalprojectplan

CriteriaforSuccessfulProjectControl
 Usetheprojectplanastheprimaryguideforco-ordinatingyourproject.

 Consistentlymonitorandupdatetheplan.

 Rememberthatqualitycommunication isakeytocontrol

 Monitorprogressontheprojectagainsttheplanonaregularbasis

 Adapttheprojectschedule,budgetand/orworkplanasnecessarytokeepthe
projectontrack

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Documentprojectprogressandchangesandcommunicatethemtoteammembers.
• Inmanycasesprojectcontrolappearedtobeineffective

Someofthereasonsare,

• Poorinformationsystem:Someoftheweaknessesobservedininformationsystemare,

– Delayinreporting:Thiswilldelayinitiationoftimely
actiontocurbtheadversedevelopment
– UnreliableInformation:Whenincorrectinformationisprovidedtotheprojectmanag
erthecontrol andfollowup will becomemeaningless.
• Humanfactor:Whentheoperationalmangerslackexperience,training,competencean
d inclinationtowardscontrollingactivityoftheproject

• Thecharacteristicsoftheproject:Whenprojectisverylargeandcomplexinvolvingm
anypeople, thetaskof control become difficult.

– Keepingtrackofpersonalperformanceandexpenditureonalarge numberofactivitiesis
demanding

– Coordinationandcommunicationproblemsmultiplywhenseveralorganizationareinvolv
edintheproject
Propercommunication:isakeyforsuccessfulmonitoringoftheprojectactivities.ThereareFo
rmalandInformalwaystotellwhat’sgoingonFormalCommunication

i. Reports–Status reports mustbecompletedbyall teammemberssothatprogressand

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problemscanbeidentifiedeasilyand early.
– Useastandardizedformatregular,predetermined intervals.

ii. Audits–Usuallyperformedbyobjectiveoutsiderswhoreviewprogress,costsand

currentplans.
iii. Projectreviewmeetings–Periodicmeetingofkeyteammembers,andsupervisors
togettogethertoresolve
issuesFrequencywilldependonsizeandnatureofprojectandproblemsexperienced.

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Informal
• Generalconversationswiththeteammembers

• Ongoinginteractionwithstakeholders

• Observations(managementbywalkingaround)
MeaningofEvaluation

Projectevaluationrepresentsasystematicandobjectiveassessmentofongoingorcompletedp
rojectsintermsoftheirdesign, implementationand
results.Inaddition,evaluationsusuallydealwithstrategicissuessuchas:

• projectrelevance,

• effectiveness,

• efficiencyinthelightofspecifiedobjectives,

• Projectimpactandsustainability.
EvaluationcanbePeriodicand/orTerminal.
Periodicevaluationsofongoingprojectsareconductedatregularinterval:
• toreviewimplementation progress,
• topredictproject'slikelyeffectsand
• tohighlightnecessaryadjustmentsinprojectdesign

Terminalevaluations(orfinalevaluations)areevaluationscarriedoutattheendofa
project.Itiscarriedout:
• toprovideanoverall assessmentofprojectperformanceandeffects/impact,
• toassesstheextenttowhichtheprojecthassucceededinmeetingtheirobjectivesand

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theirpotentialsustainability.
4.3 TypesofEvaluations
Thetypeofevaluationyouundertaketoimproveyourprogramsdependsonwhatyou
wanttolearn about the program.

Ingeneral,therearetwomaincategoriesofevaluationsofdevelopmentprojects:
 Formativeevaluations
 Summativeevaluations

Formativeevaluations:Thisisalsocalledprocessevaluations.

It examines the development of the project and may lead to changes in the way
theprojectisstructured andcarried
out.Thesetypesofevaluationsareoftencalledinterimevaluations.

Oneofthemostcommonlyusedformativeevaluationsisthemidtermevaluation.
In general, formative evaluations are process oriented and involve a systematic
collection of information toassistdecision-making duringimplementationofaproject.

Questionstypicallyaskedinthoseevaluationsinclude:
 Towhatextentdotheactivitiesandstrategiescorrespondwiththeplan?Iftheyare not in
harmony,
– Whyaretherechanges?
– Arethechangesjustified?
• Towhatextentdidtheprojectfollowthetimelinepresentedintheworkplan?
• Areactivitiescarriedoutbytheappropriatepersonnel?

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• Towhatextentareprojectactualcostsareinlinewithinitialbudgetallocations?
• Towhatextentistheprojectmovingtowardtheanticipatedgoalsand
objectivesof the project?
• Whichoftheactivitiesorstrategiesaremoreeffectiveinmovingtoward
achievingthe goalsand objectives?
• Whatbarrierswereidentified?Howandtowhatextentweretheydealtwith?
• Whatarethemainstrengthsandweaknesses oftheproject?
• Towhatextentaretheprojectbeneficiariessatisfiedwithprojectservices?
Summativeevaluations:Thisisalsocalledoutcomeorimpactevaluations(terminalevalu
ation)
• Summativeevaluationsareusuallycarriedoutasaprogramisendingorafter
completionofaprojectinorderto‚sumup‛theachievements,impactandlessonslea
rned.
• Suchevaluation lookatwhataprojecthasactually accomplishedintermsof
itsstatedgoals.

Therearetwotypesofsummativeevaluations:
• Endevaluations:aimtoestablishthesituationandtoidentifythepossibleneedforfollowup
activitieseitherby donors orprojectstaff.
• Ex-postevaluations:arecarriedouttwotofiveyearsafterexternal
supportisterminated.nThe main purposeis toassess what lastingimpactthe
projecthashador islikely tohaveandtoextractlessonsofexperience.

Summativeevaluationaddressesquestionslike,

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 Towhatextentdidtheprojectmeetitsoverallgoalsandobjectives?W
hatimpact did theprojecthaveonthelivesofbeneficiaries?

 Wastheprojectequallyeffectiveforallbeneficiaries?
 Whatcomponentswerethemosteffective?
 Whatsignificantunintendedimpactsdidtheprojecthave?
 Istheprojectreplicable?
 Isthe projectsustainable?
• Asinmonitoring,evaluationactivitiesmustbeplannedattheprojectlevel.
• Baselinedataandappropriateindicatorsofperformanceandresultsmustbe
established.
Manyorganizationsdonothavetheresourcestocarryouttheidealevaluation.
• Therefore,itisrecommendedthattheyrecruitanexternalevaluationconsultanttolead
theevaluationprocess.
• Thiswouldincrease theobjectivityoftheevaluation.

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CHAPTERFIVEEVALUATION:SOMEBASICSOFIMPACTEVALUATION

1.1.ImpactEvaluationbasic

Whatis Impact Evaluation?

IE assesses how a program affects the well-being or welfare of individuals, households

or communities (orbusinesses).Well-being at the individual level can be captured by
income & consumption, health outcomes
orideallybothatthecommunitylevel,povertylevelsorgrowthratesmaybeappropriate,depe
ndingonthequestion

IEVersusotherM&ETools

The key distinction between impact evaluation and other M&E tools is the focus on
perceptive the impact of
theprogramfromallotherconfoundingeffects.IEseekstoprovideevidenceofthecausallinkbe
tweenaninterventionandoutcomes

N.B:M&E=Monitoring&Evaluation

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Program impacts confounded bylocal,national,

globaleffects IMPACTS

difficultyo
OUTCOMES fshowingc
ausality
Users meet servicedelivery

OUTPUTS
Gov’t/programproductionfunction

INPUTS
AdvantagesofIE
⚫ Inordertobeabletodeterminewhichprojectsaresuccessful,needacarefullydesignedimpa
ctevaluationstrategy
⚫ Thisisusefulfor:

 Understandingifprojectsworked:

 Justificationforfunding

 Scalingup

 Meta-analysis:LearningfromOthers

 Cost-benefittradeoffsacrossprojects

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 Cantestbetweendifferentapproachesofsameprogramordifferentprojectstomeetnat
ional indicator

⚫ Difficultyisdeterminingwhatwouldhavehappenedtotheindividualsorcommunitiesofint
erestinabsenceoftheproject
⚫ Thekeycomponenttoanimpactevaluationistoconstructasuitablecomparisongrouptopr
oxyforthe“counterfactual”

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⚫ Problem: can onlyobservepeople in onestateofthe world at one time

⚫ Whynotcollectdataonindividualsbeforeandafterintervention(theReflexive)?Differenc
einincome,etc,wouldbedueto project
⚫ Problem:manythingschangeovertime,includingtheproject

◦ The country is growing and ITN usage is increasing generally (from

2000-2003 in Net Mark data), sohow do we know an increase in ITN use is due to
the program or would have occurred in absence ofprogram?
◦ Manyfactors affectmalariaratein agivenyear

◦ Incomeofhouseholdchangesovertime.

5.2Counterfactual:Methodology

Weneedacomparison groupthatisasidenticalinobservable
andunobservabledimensionsaspossible,tothosereceivingthe
program,andacomparisongroup that willnot receivespilloverbenefits.
Numberoftechniques:
 Randomizationasgoldstandard
 VariousTechniquesofMatching

1.2. Methodologiesinimpactevaluation

Howtoconstruct acomparison group–buildingthecounterfactual:

1. Randomization
2. Difference-in-Difference
3. MatchingPropensityscore
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1. Randomization
Individuals/communities/firmsarerandomlyassignedintoparticipation.Counterfactual:r
andomized-outgroup
Advantages:
◦ Oftenaddressedtoasthe“goldstandard”:bydesign:selectionbiasiszeroonaverageandmea
nimpactis revealed
◦ Perceivedasafairprocessofallocationwithlimitedresources

◦ Randomization:Disadvantages
Disadvantages:
◦ Ethicalissues,politicalconstraints

◦ Internalvalidity(exogeneity):peoplemightnotfulfillwiththeassignment(selectivenon-
compliance)
◦ Externalvalidity(generalizability):usuallyruncontrolled
experimentonapilot,smallscale.

◦ Difficulttoextrapolatetheresults toalargerpopulation.

◦ Doesnotalwayssolveproblemofspillovers
WhentoRandomize
If fundsareinsufficienttotreatalleligiblerecipients
◦ Randomization can be the most fair and transparent
approachTheprogramisadministered attheindividual, householdorcommunitylevel
◦ Higherlevelofimplementationdifficult:example–trunk roads

◦ Programwillbescaled-up: learningwhatworks isveryvaluable

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2. Difference-in-difference
⚫ Observationsovertime:compareobservedchangesintheoutcomesforasampleofparticip
antsandnon-participants
⚫ Identificationassumption:theselectionbiasorunobservablecharacteristicsaretime-
invariant(‘paralleltrends’in the absenceofthe program)
⚫ Counter-factual:changes overtimeforthe non-participants
⚫ Diff-in-Diff:Continued

Constraint:Requiresatleasttwocross-sectionsofdata,pre-programandpost-
programonparticipantsandnon-participants
◦ Needtothinkabouttheevaluationex-ante,before theprogram

◦ Morevalid if thereare2pre-periodsso can observewhethertrend is same

◦ Canbeinprinciplecombinedwithmatchingtoadjustforpre-
treatmentdifferencesthataffectthegrowthrate

3. Matching

⚫ Matchparticipantswithnon-participantsfromalargersurvey
⚫ Counterfactual:matchedcomparisongroup
⚫ Eachprogramparticipantispairedwithoneormorenon-
participantthataresimilarbasedonobservablecharacteristics
⚫ Assumesthat,conditionalonthesetofobservables,thereisnoselectionbiasbasedonunobse
rvedheterogeneity
⚫ Whenthesetofvariablestomatchislarge,oftenmatchonasummarystatistics:theprobabilit
yofparticipationas afunction ofthe observables (thepropensityscore)

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Advantages:

◦ Doesnotrequirerandomization,norbaseline(pre-interventiondata)

Disadvantages:

◦ Strongidentification assumptions

 Inmanycases, maymakeinterpretation ofresultsverydifficult

◦ Requiresverygood qualitydata: needtocontrol forall

factorsthatinfluenceprogramplacement

◦ Requiressignificantlylargesamplesizetogeneratecomparisongroup

MatchinginPractice

⚫ Using statistical techniques, we match a group of non-participants with participants

using variables
likegender,householdsize,education,experience,landsize(rainfalltocontrolfordrought)
,irrigation(asmanyobservable characteristics not affected byprogram intervention)
⚫ Onecommon method:PropensityScoreMatching
Propensity-ScoreMatching(PSM)
Propensityscorematching:matchtreatedanduntreatedobservationsontheestimatedprobabilit
yofbeingtreated(propensityscore). Most commonlyused.

⚫ Matchon thebasis ofthepropensityscoreP(X)=Pr (d=1|X)

◦ dindicatesparticipationinproject

◦ InsteadofattemptingtocreateamatchforeachparticipantwithexactlythesamevalueofX,w

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ecaninstead match on theprobabilityof participation.

◦ PSM: KeyAssumptions
⚫ Keyassumption:participation isindependent of outcomesconditional onXi

◦ Thisisfalseifthere areunobservedoutcomesaffectingparticipation

◦ Enablesmatchingnotjustatthemeanbutbalancesthedistributionofobservedcharacteristi
csacrosstreatmentand control
Stepsin ScoreMatching
1. Needrepresentativeand comparabledataforbothtreatmentandcomparisongroups

2. Usealogit(orotherdiscretechoicemodel)toestimateprogramparticipationsasafunctiono
fobservablecharacteristics
3. Usepredictedvaluesfromlogittogeneratepropensityscorep(xi)foralltreatmentandcom
parisongroupmembers

CalculatingImpactusingPSM
4. MatchPairs:

 Restrictsampletocommon support(asinFigure)
 Need to determine a tolerance limit: how different can control individuals or villages
be and still be a match?
Nearest neighbors, nonlinear matching, multiple matches

5. Oncematchesaremade,wecancalculateimpactbycomparingthemeansofoutcomesacros
sparticipantsandtheirmatched pairs
⚫ PSM vs Randomization
⚫ Randomizationdoesnotrequiretheuntestableassumptionof independence

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conditionalonobservables
⚫ PSMrequireslargesamplesandgooddata:

1. Ideally,thesamedata sourceisusedfor participantsandnon-participants

2. Participantsandnon-participantshaveaccesstosimilarinstitutionsandmarkets,and

3. Thedatainclude Xvariablescapableofidentifyingprogramparticipation andoutcomes.

4. Lessonson MatchingMethods

⚫ Typicallyused when neither randomization, RD orotherquasi experimental options

arenotpossible

1. Case1: nobaseline. Cando ex-postmatching

2. Dangersofex-postmatching:

Matchingonvariablesthatchangeduetoparticipation (i.e.,endogenous)

Whataresomevariablesthatwon’tchange?

⚫ MatchinghelpscontrolonlyforOBSERVABLE differences, notunobservabledifferences

⚫ MoreLessonsonMatchingMethods

⚫ Matchingbecomesmuchbetterincombinationwithothertechniques,suchas:

1. Exploitingbaselinedataformatchingand usingdifference-in-differencestrategy

2. If anassignmentruleexistsforproject,can matchonthisrule

3. Needgoodqualitydata

4. Commonsupport canbeaproblem if two groupsareverydifferent

⚫ PSMinPractice

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⚫ Toestimatethe propensityscore, authorsused:

⚫ Villagelevelcharacteristics

1.Including:Villagesize, amountofirrigated land,schools,infrastructure(busstop,

railwaystation)
⚫ Householdvariables

1. Including:Ethnicity/caste/religion,assetownership(bicycle,radio,thresher),education
albackgroundofHHmembers
2. Aretherevariableswhich cannotbeincluded?
3. Onlyusingcross-section,so no variables influenced byproject

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3.Reference

AgrawalA.N.(1989)Economicsofdevelopmentandplanning,2ndedition,Vikas,DelhiJhin
gan,M.L.(1997).TheEconomicsof DevelopmentandPlanning,35thed., Vikas
PublishingHouse,NewDelhi.
Lewis,Arthur(1972)DevelopmentPlanning:TheEssentialsofEconomicPolicy,GeorgeAll
enand UnwinLtd.
Round, J I (2003) „Constructing SAMs for Development Policy Analysis:
LessonsLearnedandChallengesAhead',EconomicSystemsResearch,15(2): 161-184.
Sadoulet,E.anddeJanvry,A.(1995)QuantitativeDevelopmentPolicyAnalysis,theJohnsHo
pkinsUniversity Press, Baltimore and London.
Todaro,MichelP.(1992),DevelopmentPlanning:TheoryandPracticeinEconomicsforaDe
velopingWorld, Longman, Londonand NewYork.
Development Plans of Ethiopia

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