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Lecture6_3509 - Project Evaluation We have seen Rationale...

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Project Evaluation We have seen: Rationale for public sector involvement Economic Setting Objectives of the Project Methods for appraisal Today: Consideration of alternatives (ch 3) Separable components What costs/benefits to include (ch 4) Case Study Using the correct prices 1
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2 Consideration of Alternatives (Chapter 3) Fundamental step in the evaluation process. Economic analysis can indicate the alternative that creates the most benefits to the economy from the resource in question. Project should be compared to: Doing nothing Alternative designs (e.g. scale, technology, location, starting date)
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3 With and Without comparisons Consider a project of enriching a natural forest Without the project: natural forest grows and produces timber (but, slowly) With the project: enriched forest. It produces timber faster Year Net benefits of timber without the project Net benefit of timber with project Incremental net benefits 1 5 -10 -15 2 5 0 -5 3 10 15 5 4 15 25 10 5 20 35 15
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4 Comparing with Private Sector Alternative In some cases the private sector would undertake the project anyway. In this case, the action of government providing a good or service should be compared with the situation when the private sector provides the same good or service. Example: electricity supply private sector: monopoly public sector: provision with price = marginal cost Compare welfare gains between both
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5 Separable Components Many times, projects have several interrelated subprojects or components. If the components are independent, each component must be treated as if it were a separate project. Analyst should determine NPV of each component and drop those with negative NPV. Example of independent components: In a National Park: component one is a picnic area in the South End; component two is a playground in the North end. NPV of the entire project equals the sum of the NPV of individual components
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6 Unseparable Components Example. In a National Park Component one is a picnic area and component two is a road that takes to the picnic area. NPV of the total project is different than the NPV of the individual components. Appraising the project requires: Apprise each individual sub-project Apprise combination of sub-projects Apprise the entire project
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By: Pablo Benitez, 7 Identifying Cost and Benefits (Chapter 4) Important step in economic analysis. Remember: we are evaluating the project from the government’s perspective, more precisely, the perspective of the society (e.g. if a resource is free, there might still be a cost to the society is somebody uses it). Sometimes costs and benefits are difficult to identify because they are not reflected in the financial analysis (e.g. pollution).
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