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Chapter 6 Project Evaluation

The document discusses project evaluation methods, focusing on financial analysis and benefit-cost analysis (BCA) for both private and public projects. It outlines the steps involved in BCA, including the identification and valuation of costs and benefits, and introduces non-market valuation methods such as the Contingent Valuation Method and Hedonic Pricing Method. The aim is to assess the economic worth of projects and their impact on society as a whole.

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Lakdinithi Subasinghe
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4 views

Chapter 6 Project Evaluation

The document discusses project evaluation methods, focusing on financial analysis and benefit-cost analysis (BCA) for both private and public projects. It outlines the steps involved in BCA, including the identification and valuation of costs and benefits, and introduces non-market valuation methods such as the Contingent Valuation Method and Hedonic Pricing Method. The aim is to assess the economic worth of projects and their impact on society as a whole.

Uploaded by

Lakdinithi Subasinghe
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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PROJECT MANAGEMENT

By

Pradeep Alexander
Business Finance Consultant / Visiting Lecturer / Corporate Trainer
PhD in Finance reading UsJ,
MBA. Finance UsJ, MA in Financial Economics UoC, M Sc. Project Mgt. AeU Malaysia,
B. Com. Sp. Accountancy. Hons. UsJ, ICMA, CILT, CA Intermediate, ACCA (finalist)
Chapter - Six

Project Evaluation
Learning Outcome
§ Understand different project evaluation methods
§ Evaluate projects using financial tools
Evaluate projects using the benefit-cost analysis
§ Value nonmarket activities and items in a project
§ Understand the concept of shadow pricing
Project Evaluation

Financial Analysis: This method is primarily used in the private sector


to determine which outcomes are best from the perspective of private
interest. Some tools are;
Ø Internal Rate of Return Method
Ø Payback Method

Benefit-Cost Analysis (BCA): This method is designed for the


evaluation of public projects, and project outcome is always evaluated
on the basis of public interest.
Benefits-Cost Analysis

• How does one choose appropriate development projects from a group


of alternative projects?
• Benefit-Cost Analysis (BCA) is an appropriate tool to answer the
above question.
• BCA accesses the desirability of an alternative by considering the
economic worth to society as a whole; net social benefit (NSB).
• NSB = Willingness to Pay - Opportunity Cost
NSB is different from the individual or private benefits
Steps in BCA

• Identification of cost and benefits,


ü Gains and looses of all concerned parties are needed to be calculated
ü Economic cost vs. historical cost
ü With-Without vs. Before-After analysis
ü Real output effects vs. pecuniary effects (e.g. Property values in a rural area
have increased as a result of a hospital project)
• Valuing cost and benefits
• Comparing cost and benefits
• Project selection
• Cost effective analysis
Valuing Cost and Benefits

• If market is competitive, use market price to evaluate benefits and


costs.
• However, many projects involve inputs and outputs for which there are
no formal markets. Important examples include public goods,
environmental quality, health and safety, and human life. Sometimes,
price data might not reflect the market value. In particular,
ØPrice data may not available for some of the cost and benefits.
ØPrices may be distorted by the market failures or government interventions.
ØEven if prices are available and are not distorted, still there may be a problem
if the project exerts a non-marginal impact on demand and supply in related
markets
Non-market valuation

1. Contingent Valuation Method


2. Hedonic Pricing Method
3. Travel Cost Method
4. Averting Behaviour Approach
Non-market valuation

Contingent Valuation Method:


CVM is essentially a method which provides values (in terms of willing
to pay (WTP) or willing to accept compensation (WTA)) of the
concerned people for an environmental good as stated by them during a
survey. Rather than prices actually paid or received, WTP and WTA are
used because many of the project impacts that are to be included in the
economic analysis will be unmarketable, for example, biodiversity
preservation, or incompletely marketed, such as water supply and
sanitation benefits.
Non-market valuation

Hedonic Pricing Method:


The hedonic pricing method is used to estimate economic values for
ecosystem or environmental services that directly affect market
prices. It is most commonly applied to variations in housing prices that
reflect the value of local environmental attributes.
• It can be used to estimate economic benefits or costs associated with:
• environmental quality, including air pollution, water pollution, or
noise environmental amenities, such as aesthetic views or proximity to
recreational sites
Non-market valuation

Travel Cost Method:


The travel cost method is used to estimate economic use values
associated with ecosystems or sites that are used for recreation. The
method can be used to estimate the economic benefits or costs resulting
from:
• changes in access costs for a recreational site
• elimination of an existing recreational site
• addition of a new recreational site
• changes in environmental quality at a recreational site
Non-market valuation

Averting Behaviour Approach:


Revealed preference (RP) methods refer to a range of valuation
techniques which all make use of the fact that many (non-market)
environmental goods and services are implicitly traded in markets,
which allows then for RP methods to uncover these values in a variety
of ways, depending on the good in question and the market in which it is
implicitly traded. For example, demand for nature recreation can be
estimated by looking at the travel costs associated with this activity.
Case Study Discussion

Thank You

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