Professional Documents
Culture Documents
3
Appraisal Framework
a) Forecasting changes
b) Evaluating those changes
4
Components of Economic Analysis (1)
6
Economic and Financial Prices
8
Benefits from Road Investment
10
Primary Effects (1)
11
Primary Effects (2)
12
Secondary Effects
13
Consumers Surplus Approach
14
Normal and Generated Traffic Benefits
Cost +
C1 Additional benefits to
Generated traffic
C2
Demand Curve
(Price Elasticity of Demand)
T1 T2 Traffic
Normal Generated
15
Generated Traffic Benefits
16
Producers Surplus Approach
Captures secondary benefits
Advantages: Draws attention to changes in
agricultural output (key economic activity in rural
areas)
Disadvantages: No reliable way of predicting
response
- impact studies give widely different answers
- it could be based on agricultural supply price
elasticities but this is almost never done; it
requires very careful examination to use.
For most projects benefits are just invented !
17
Producers Surplus
P1
Output O1 O2
18
Coverage and Double Counting
19
Economic Comparisons
Economic analysis involves a comparison of
With and Without project cases
Forecasts are made of traffic, road condition,
VOC and road maintenance effects for BOTH
scenarios
An unrealistic Without case (i.e. with little
maintenance) can give a false result
A range of With investment cases should be
analyzed to find the best solution
20
Traffic Categories
Normal traffic: Existing traffic and growth that would
occur on road, with and without the investment
Diverted traffic: Traffic diverted from another road
with same origin and destination to as the project
road as a result of the investment
Generated traffic: Traffic associated with existing
users of the road driving more frequently or driving
further than before
Induced traffic: Traffic attracted to the project road
due to increased economic activity in the roads
zone of influence brought about by the project
21
Benefits from Road Investment
22
Benefits of Upgrading to a
Motorable Track
Headloading
C1
Track
Costs
Improved
road
C2
C3
T1 Traffic T2 T3
23
Cost Effectiveness Against
Standard of Road
24
Development Benefits
25
Estimating Benefits
Normal traffic benefits: tripsN * d1 * (VOC1- VOC2)
27
Economic Decision Criteria (2)
Payback Period
28
Economic Decision Criteria (3)
Notes:
1. check for robustness to changes in key variables (sensitivity analysis)
2. with incremental analysis
3. IRR may be indeterminate with NONE or MANY solutions.
29
Present Value Calculation
Period Flow
0 A0 PV(A0) = A0
1
2
3
4
5 A5 PV(A5) = A5 / (1 + i ) ^ 5
6
7
PV(Aj) = Aj / (1+ i ) ^ j
PV(Aj) = Present Value of Aj
Aj = Amount at year j
i = Discount rate
j = Year
30
Present Value at 12.0% Discount Rate
31
Discount Rate
34
NPV Decision Rule
Discount Net
Rate (i) Discount Present
12.0% Rate (i) Present
36
NPV and IRR Calculation (2)
8000
4000
2000
Internal Rate
of Return
0
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%
-2000
-4000
Discount Rate (%)
37
NPV Versus IRR
10000
8000
NPV at 12%
Discount Rate
6000
Net Present Value (M$)
4000
Internal Rate
2000
of Return
0
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%
-2000
-4000
Discount Rate (%)
- The IRR and NPV will not necessarily rank the alternatives by the same order
- Always use NPV to compare project alternatives
38
Multiples Rates of Return
Net
Year Benefits Multiple Rates of Return
0 -500
1 1150
2 -660 2.00
NPV at 12% 0.64
IRR #1 10%
IRR #2 20% 0.00
0% 5% 10% 15% 20% 25% 30% 35%
Discount
-2.00
Rate NPV
Net Present Value (M$)
0% -10.0
2% -6.9
-4.00
4% -4.4
6% -2.5
8% -1.0 -6.00
10% -0.0
12% 0.6
14% 0.9 -8.00
16% 0.9
18% 0.6
20% 0.0 -10.00
22% -0.8
24% -1.8
26% -3.0 -12.00
28% -4.4 Discount Rate (%)
30% -5.9 39
No Rate of Return
Net
Year Benefits No Rate of Return
0 200
1 300
2 350 900
NPV at 12% 747
IRR #NUM! 800
700
Discount Net Present Value (M$)
Rate NPV 600
0% 850.0
2% 830.5 500
4% 812.1
6% 794.5 400
8% 777.8
10% 762.0
300
12% 746.9
14% 732.5
200
16% 718.7
18% 705.6
20% 693.1 100
22% 681.1
24% 669.6 0
26% 658.6 0% 5% 10% 15% 20% 25% 30% 35%
28% 648.0 Discount Rate (%)
30% 637.9 40
Same Rate of Return
Net Benefits
Project Project
Year 1 2 Same Rate of Return
0 -1000 1000
1 1250 -1250 300
NPV at 12% 116 -116
IRR (%) 25% 25%
200
Discount Project Project Net Present Value (M$)
Rate 1 2
1% 238 -238 100
3% 214 -214
5% 190 -190
0
7% 168 -168 0% 5% 10% 15% 20% 25% 30% 35%
9% 147 -147
11% 126 -126 -100
13% 106 -106
15% 87 -87
17% 68 -68 -200
19% 50 -50
21% 33 -33
-300
23% 16 -16
25% 0 0 Discount Rate (%)
27% -16 16
Project 1 Project 2
29% -31 31
31% -46 46
41
Incremental Rate of Return
Alternative A - Base
Investments Profits Present
or or Net Value Present
Year Costs Benefits Benefits Factor Value
NPV = 6.3
0 8 0 -8 1.00 -8.0 IRR = 100.0%
1 0 16 16 0.89 14.3 MIRR = 100.0%
B/C = 1.79
Alternative B - Base
Investments Profits Present
or or Net Value Present
Year Costs Benefits Benefits Factor Value
NPV = 7.1
0 100 0 -100 1.0000 -100.0 IRR = 20%
1 0 120 120 0.8929 107.1 MIRR = 20%
B/C = 1.07
Alternative B - Alternative A
Investments Profits Present
or or Net Value Present
Year Costs Benefits Benefits Factor Value
NPV = 0.86
0 92 0 -92 1.0000 -92 IRR = 13%
1 0 104 104 0.8929 93 MIRR = 13%
B/C = 1.01
42
IRR Reinvestment Assumption
IRR IMPLICIT ASSUMPTION:
ALL CASH FLOW VALUES WILL EARN THE IRR INTEREST RATE
Discount
Rate (i)
12.0%
Future Value in Year 4
Investments Profits If You If You Receive
or or Net Invest at and Invest at
Year Costs Benefits Benefits 29.3% 29.3%
a b c d = c-b Interest Interest
NPV= 3508
Total 27940
IRR= 29.3%
43
Modified Internal Rate of Return
Modified Internal Rate of Return Calculation
Financing Reinvestment
Rate (i) Rate (i)
12.0% 12.0%
MIRR = 20.7%
44
Benefits X Cost
120
100
Alternative B
80
Benefits
60
40
20
Alternative A
0
0 20 40 60 80 100 120
Costs
45
Net Benefits X Costs (Efficiency Frontier)
7
Alternative B
6
Net Benefits (NPV)
5
Alternative A
0
0 20 40 60 80 100 120
Costs
46
Comparison of Alternatives
When comparing project-alternatives,
the Net Present Value (NPV) is used
to select the optimal project-alternative
(alternative with highest NPV)
The Internal Rate of Return (IRR) or
the B/C ratio are not recommended to
compare alternatives of a given
project Alternatives NPV
Project 0.0
Optimal Alternative:
3.7
Highest NPV
6.7
5.5
47
Ranking Projects
When comparing the economic priority
of different projects, a recommended
economic indicator is the NPV per
Investment ratio
Selected Alternative NPV/Investment
P
Projects Overlay 8.4 R
I
O
Reseal 5.2 R
I
T
Overlay 2.1 Y
48
Budget Constraints Simple Methodology
Section 1
Option Cost NPV
A 2 4
B 5 7
C 7 8
Section 2
Option Cost NPV
A 1 3
B 3 6
C 5 8
dNPV/dCost
52
HDM-4 Optimization Example (3)
54
Appraisals & Post Evaluations (2)
55
Sensitivity Analysis
Consequences of changes on inputs
Investment Costs (e.g. +15%)
Traffic Growth Rate (e.g. = zero)
Generate Traffic (e.g. = zero)
Value of Time (e.g. = zero)
A = Investment Costs Increase (e.g. +15%)
B = Road User Benefits Decrease (e.g. -
15%)
C = A and B together
56
Switching Values Analysis
Investment Cost
Road User Benefits
57
Risk Analysis
Inputs vary at the same time Country
Project
Africa Region
Road Management Initiative
Road Road from Point A to Point B
Median 11.7%
25%
Percentile 25% 9.4%
20% Percentile 50% 11.7%
15% Percentile 75% 14.1%
10%
Probability that IRR is less than 12% 50%
5% Probability that IRR is greater than 12% 50%
0%
0.50
0.58
0.65
0.73
0.81
0.88
0.96
1.04
1.12
1.19
1.27
1.35
1.42
1.50
1.58
1.65
1.73
1.81
1.88
1.96
Multiplier Factor Upgrade Road to Surface Treatment Standard
8%
7%
Frequency Distribution
Project Investment Costs 6%
14% 5%
12%
4%
Frequency Distribution
10%
3%
8%
2%
6%
4% 1%
2% 0%
10.1%
11.2%
12.2%
13.2%
14.2%
15.3%
16.3%
17.3%
18.3%
19.4%
20.4%
21.4%
22.4%
23.5%
24.5%
5.0%
6.0%
7.1%
8.1%
9.1%
0%
0.50
0.58
0.65
0.73
0.81
0.88
0.96
1.04
1.12
1.19
1.27
1.35
1.42
1.50
1.58
1.65
1.73
1.81
1.88
1.96
0%
Share of Network Length
40%
20%
0%
O Community
Local Government
Responsability
Provincial/Central Government
Type of Network
Rural Transport Infrastructure Trunk or Provincial Road
61
Economic & Social Benefits
Consumers and producers surplus approaches are very
economic in orientation. Yet roads provide social
benefits including improved access to health and
education facilities and improved social mobility that
cannot be easily translated into conventional economic
benefits. Although they may have important long term
economic consequences. Improved health and
education and more secure social networks increase
long term earning capabilities but so far the economic
forecasting framework does not include this.
64
Community Priorities
65
Cost Effectiveness Analysis (CEA)
66
CEA Comparison of Alternatives
Alternatives Investment
Project 2.0
Optimal Alternative:
3.7
Lower Investment
1.7
5.5
67
Projects Eligibility with CEA
150 Eligible
Not Eligible
500
68
Effectiveness Indicator Threshold
40 ?
Reasonable Non Reasonable
35
?
30 Evaluate Universe
Frequency of Projects
25
of Projects and
Available Budget
20
15
10
0
50
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95
Investment per Population (US$/person)
69
Possible CEA Indicators
70
Options for Beneficiary Population
71
Total Beneficiary Population (1)
Main
D Population
Center
B C E F
Village
74
Multi Criteria Analysis (2)
76
Multi Criteria Analysis Example (1)