VDR and VEF Distribution—CYP (Cambria Yarns Project)

In the VDR and VEF distribution analysis for the cotton project is
Gainers and losers are indicated in each table (P = project; G =
government; W = workers; F = farmers; E = external sector). Positive
values are gains, and negative values losses, for each group. Groups
selected for distribution analysis depend upon the social structure in the
project’s host environment and with significant distributional impacts as
a consequence of the project.
Distribution Analysis
Income distribution effects engendered by the project are weighted to
reflect their consumption contributions. The income stream can be
viewed into two streams, either to savings/investment (s) or to
consumption (1 – s). The portion applied to savings/investment sets up a
stream of future consumption (intergenerational). Direct consumption
(contemporaneous) is weighted to reflect the social goals of decision
makers.
Savings Impact
According to the model, when a unit of income is applied to savings, an
infinite series of investments is generated based upon the savings rate
(marginal propensity to save) of the group receiving the income. The
effect on future consumption varies for each affected group according to
its particular savings rate. The effect of the incremental income stream
on future consumption for each group can be determined as
(1−s)q
Pinv = i−sq , (s, q, and i) are assumed to be constant in the project
(sq)- rate of accumulation
(1-s)q marginal investment
(i –sq) artificial rate of discount
Where
Pinv = shadow price of investment (The shadow price of investment is the
consumption value of a unit of savings)
s=marginal propensity to save for group
q=marginal return on capital invested
i=social rate of discount (EDR)
The formula represents the infinite series of deferred consumption
benefits generated by marginal investments from savings/investment for
each group and for each operating period.
Distribution Impact of Savings
The distribution impact of savings for the CYP is shown in Table. The
marginal return on capital is estimated at 10 percent. The EDR is
estimated at 10.3 percent, (the weighted cost of capital for the project,
adjusted for the premium on domestic investment; see the subsection
“Economic Discount Rate” and Table 6.3).
From this stream of flows of the project NPV and IRR values labeled as
“Economic impact including savings” are the sum of economic values at
efficiency level (VEF) and the “Total economic value of savings.”
The distribution weighting for savings, the NPV is 399.9, which is the
sum of NPV at VEF level (−2,999.1) and the savings impact (3399.0),
each discounted at the EDR of 10.3 percent. The IRR for “Economic
impact including savings” is 10.9 percent. Savings have a positive
impact on the project’s economic performance.
Direct Consumption Impact
The portion of the project’s distribution effect that is applied directly to
consumption can be weighted to reflect the social policy priorities of
decision makers. For each group the income involved is the remainder
after deducting the portion saved. Weighting can be based upon the ratio
of consumption for each group compared with the base level of
consumption that is, the level of per capita consumption at which income
flow to a private individual is considered as valuable as income flow to
the government. At the base level of consumption, the result of
government indifference is that marginal income increments (or
decrements) are neither taxed nor subsidized.
The relationship that can be applied is
n
CONS b
P =( ci )

Where
PCONS =shadow price of consumption
b=base level of consumption
ci =consumption level for group i
n=elasticity of marginal utility of consumption with respect to changes
in per capita income; n can be considered a parameter to be adjusted by
decision makers and it is normally limited to the range between 0 and 2.
At a value of zero, income is not weighted. At n = 2 the government
policy is highly egalitarian.
For the Cambria Yarns Project the parameter n is set at 0.5. This means
that consumption of a group at one-fourth of the base level would be
weighted twice its nominal value:
0.5
1

( ) =2
1
4

Total economic distribution value is the sum of distribution

effects of each classification, which consists of VEF plus
savings impact. When discounted at the EDR of 10.3 percent,
NPV is 1,218.6 and the economic IRR is 12.3 percent (Table
6.10). In other words, NPV and IRR at this level indicate the
economic value of the project including both savings and direct
consumption impacts.

Adjustment for Policy Goals

Resources generated by the project may be considered merit
goods if their production accords with social policy goals, or
demerit goods if not. Assignment of merit and demerit values
may be based upon considerations such as regional
development, use of strategic resources, public health, job
creation, industrial policy, environmental goals, or other priority
goals. If the social value of project output is not fully reflected
in the difference between the social value of income distribution
effects and the efficiency value, the value of the project can be
raised or lowered by adjustments to the net benefit values in
each project period, from which economic NPV and IRR can
then be determined.

An example is the production of food products that have wide

appeal but adverse health impacts. If the adverse consequences
of consumption have otherwise not been taken into account in
the analysis, demerits can be deducted. If the economic value of
the output is x and its social value is considered to be 70 percent
of x, a conversion factor of 0.7 would be applied to the value of
output in each period and a new NPV calculated. The practice of
making this type of adjustment is necessarily highly subjective
and open to question. Whether adjustments are economically or
politically inspired will always remain in doubt. Only if an
adjustment system of this type is developed systematically and
applied uniformly, and in a non-subjective manner, are such
alterations justified.
NB
1Expatriate staff paid in US$, so collect premium on foreign exchange.
2Government pays premium on foreign exchange loan principal and
interest.
3Premium on dividends paid to NTC.
4Distortion related to collection of foreign exchange receivables at end
of project.
5Government pays exchange premium on agricultural imports.
IRR (internal rate of return)
The internal rate of return is a metric used in financial analysis
to estimate the profitability of potential investments.
The internal rate of return is a discount rate that makes the net
present value (NPV) of all cash flows equal to zero in a
discounted cash flow analysis.
IRR calculations rely on the same formula as NPV does.
 IRR is the annual rate of growth an investment is expected
to generate.
 IRR is calculated using the same concept as NPV, except it
sets the NPV equal to zero.
 IRR is ideal for analyzing capital budgeting projects to
understand and compare potential rates of annual return over
time
The higher an internal rate of return, the more desirable an
investment is to undertake. When comparing investment options
whose other characteristics are similar, the investment with the
highest IRR would probably be considered the best.

NPV (Net present value)

The difference between the present value of cash inflows and the present
value of cash outflows over a period of time.
NPV is used in capital budgeting and investment planning to analyze the
profitability of a projected investment or project.
The following formula is used to calculate NPV:
 n
Rt
NPV = ∑ (1+i)
t =1
t

Where:
Rt=Net cash inflow- outflows during a single period 
ti=Discount rate or return that could be earned in
alternative investments
t=Number of timer periods

European depositary receipt (EDR) is a negotiable security

issued by a European bank that represents the public security of
a non-European company and trades on local exchanges. The
shares issued by the bank are priced in local currencies (mainly
Euro) and also pay dividends, if applicable, in local currencies.
Non-European companies may list EDRs to attract a wider base
of investors. EDRs are the functional equivalent of American
depositary receipts (ADR) in the U.S.