PROJECT MANAGEMENT

Project Evaluation Cost Benefit Analysis

UNDERSTANDING THE CONCEPT OF SOCIAL INTEREST RATE

Represented by i Derived using the concept of opportunity cost and shadow price
Opportunity cost = true marginal value of a good higher than market price Shadow price = eg. the price charge by a free-for-all lake to a company polluting it which would otherwise be free

PERFORMING CBA Step 1

Determine P, F, A, i, n
P0 = initial cost F = +ve or ve discrete payment A = uniform periodical payment i = social interest rate n = project life

PERFORMING CBA Step 2

Put P, F, A, i and n on a cashflow diagram
C/flow F A2 i = x% per year n 0 P0 1 2 A1 3 4 5 10

CALCULATING CBA Step 3

Select NPV method

CALCULATING CBA Step 4

Using the NPV method
Find the PV for all cost components

CALCULATING CBA Step 5

Using the NPV method
Find the PV for all cost components Find the PV for all income components

CALCULATING CBA Step 6

Using the NPV method
Find the PV for all cost components Find the PV for all income components Find the ratio of PVincome/PVcost

CALCULATING CBA Step 6

CBA = PVincome/PVcost

CALCULATING CBA Step 7

Project is viable if CBA > 1.0

CA9
Surf the PSZ e-database. Find a journal paper showing an example of CBA performed on a project. Convert it to a one-page summary. Print them. Submit the paper and the summary on Wednesday 31st Jan 07