Week No.

9 COST BENEFIT ANALYSIS & FINANCIAL APPRAISAL

Lecture No. L-26 and 27

Cost Benefit Analysis and Indicators 1

Challenges Cost Benefit Analysis 2

Project Appraisal 3

Aspects of Project Appraisal 4

Financial Appraisal 5
Week No. 9 Cost Benefit Analysis
Lecture No. L-26 and 27
▪ CBA is a process for evaluating the merits of a
particular project in a systematic way in terms of
cost and benefits of the project.
1
▪ The conceptual and theoretical framework of CBA is
derived from welfare economics.
2
▪ C o st B e ne fi t A n a l ys is ( C BA ) i s a n
eevaluation
co n o m i ctechnique that measures all the positive 3
(beneficial) and negative (costly) consequences of
an intervention or program in monetary terms. 4

▪ The valuation of all program outcomes in monetary 5

units allows decision makers to directly compare
the outcomes of different types of interventions.
Week No. 9 Challenges of Cost Benefit Analysis
Lecture No. L-26 and 27

▪ Accuracy problem
✓ Inaccurate cost and benefit estimation

✓ Rely heavily on similar projects of past 1

✓ Rely heavily on project members 2

▪ Unconscious bias of team members 3

▪ Determination of which cost to include in the analysis 4

5
Week No. 9 Project Appraisal
Lecture No. L-26 and 27
▪ Critical examination of the project from all aspects is called appraisal.

▪ Analysis of probable costs and benefits that leads to desirability for committing
resources. 1

▪ It is carried out at two stages: 2

✓ Internal Appraisal
✓ External Appraisal 3

▪ Project appraisal is necessary for knowing project is viable or not. 4

▪ It is very useful for entrepreneurs. 5

Week No. 9 Aspects of Project Appraisal
Lecture No. L-26 and 27
✓ Social Aspects

✓ Economic Aspects
1
✓ Environmental Aspects
2
✓ Financial Aspects
3
✓ Administrative/Management Aspects
4
✓ Commercial Aspects
5
✓ Technical Aspects
Week No. 9 Financial Appraisal
Lecture No. L-26 and 27

▪ The appraisal of the financial aspects involves scrutiny of the following -

✓ Cost of the project & means of financing
1
✓ Cash flow estimates
2
✓ Projected balance sheets
3

5
Week No. 9 Financial Appraisal Techniques
Lecture No. L-26 and 27
Pay Back
Period

2
Internal Financial Averag
Rate ` e Rate
3
of
Returns Appraisal
Method of
Return

5
Net
Profitability
Present
Index
Value
Week No. 9 Payback Period
Lecture No. L-26 and 27

Merits -
▪ Best when project have shorter period & less cost
▪ Easy to operate & simple to understand 1
▪ Helps to entrepreneur to invest in quick return funds
2
Demerits -
▪ More on liquidity then profitability 3
▪ Not cover the earning beyond pay back period
▪ Suitable for small project 4
▪ Ignores cost of capital
5