MIT1_040s09_lec15

MIT1_040s09_lec15 - MIT OpenCourseWare http:/ocw.mit.edu...

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MIT OpenCourseWare http://ocw.mit.edu 1.040 Project Management Spring 2009 For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms .
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Cost Benefit Analysis Massood V.Samii
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Outline What is cost benefit analysis? Why should we use CBA as oppose to NPV? What are the complexity of CBA? Issue of consumer surplus and its role in determination of social benefit Example of cost benefit analysis
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Public Projects Public projects are those that are undertaken by government. Their objective is not necessarily to maximize profit or NPV as discussed earlier The main objective of public projects is to maximize social benefits and return to the society Problem arises regarding quantification of benefits and costs. Often there is no tradable market for public goods (parks, environmental clean up, non-toll road) or even if there is, it does not reflect the true value to the society (public education, public transportation). Method used for the evaluation of project from public point of view ( as oppose to private firm which looks purely from private value creation for owner/stockholders) is called Cost-Benefit Analysis ( value creation for society).
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Cost Benefit Analysis “Cost-Benefit Analysis is a procedure for evaluating the desirability of a project by weighting benefits against costs. Results may be expressed in different ways, including internal rate of return, net present value and benefit-cost ratio.” Guide to Cost-Benefit Analysis of Major Projects, In the context of EC Regional Policy, 1997 edition, European Union European Union Identify step necessary for Cost-Benefit Analysis for major projects: 1 Project identification 2 Definition of objectives (unemployment, economic growth, reduce regional income inequality) 3 Feasibility and option analysis 4 Financial analysis 5 Socio-economic costs 6 Socio-economic benefits 7 Discounting 8 Economic rate of return 9 Other evaluation criteria 10 Sensitivity and risk analysis
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Expected financial internal rates of Time horizon (years) in the appraisal return of a sample of 400 major of a sample of 400 major projects of projects of the ‘first generation’ and the ‘first generation’ and ‘second ‘second generation’ combined generation’ combined average Number* of projects Energy 7.0 6 Water and environment -0.1 15 Transport 6.5 55 Industry 19.0 68 Other services 4.2 5 TOTAL 11.5 149 average time horizon Number* of projects Energy 24.7 9 Water and environment 29.1 47 Transport 26.6 127 Industry 8.8 96 Other services 14.2 10 TOTAL 20.1 289 (*) Projects for which data were available. (*) Projects for which data were available. Source: Guide to Cost-Benefit Analysis of Major Projects, In the context of EC Regional Policy, 1997 edition, European Union
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Why Cost-Benefit Analysis Objective of investment may not necessarily be profit, but other factors such as job creation (interesting to consider current stimulus package). In public goods, for example non-toll highway, since no
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This note was uploaded on 11/29/2011 for the course CIVIL 1.018j taught by Professor Markusbuehler during the Fall '08 term at MIT.

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MIT1_040s09_lec15 - MIT OpenCourseWare http:/ocw.mit.edu...

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