Financial and Economic Analysis Part 1 XG

Ghent University – Department Agricultural Economics

Project Management

Financial and economic analysis of investment projects

Project cycle

preparation

evaluation

Identification

appraisal

Implementation(monitoring)

Objective-oriented intervention planningLogical framework

PERTFinancial and economicalanalysis

Project selection

• Production• Marketing • Financial

• Labour• Administration

Difference between financial and economic analysis

• Financial analysis confronts expenditures with revenues for each entity involved (money flows)

• Financial analysis identifies the money needed to finance a project

• Economic analysis focuses on community aspects and evaluates by comparing the financial value of the resources used with the extra benefits generated for the community or economy as a whole

EVAL.

PROG.

SECTOR

Needs

ObjectiveInput

supportOutput

realisation

Results

Impact

Conceptual framework

Relevance

Use & sustainability

Effectivity

Efficiency

External factors

Basic principles for identification of costs and benefits

The increase of marginal income is measured under following principles:

• with- and without principle• Only direct effects• Constant price principle• Time = economic lifetime• Only monetary effects• Same denominator• Reality principle

2002 2004

Start of project

q

Time (t)

BEFORE

1

AFTERWITHOUTPROJECT

AFTERWITH PROJECT

2

3

2010

Construction of a dam against erosion Changes in the dam against saltation

Irrigation project Colonisation project

Classification of project impact

• Direct or primary impact: direct consequence of the project implementation– Investment effects

– Exploitation effects

• Indirect impact: result from links vertically related with the project• Secondary or multiplier impact: multiplier effects of the direct and

indirect benefits• External impact: positive or negative consequences for externals of

the project without compensation • Social impact: impact on redistribution of income, employment,

education, …

Poject Costs

• Definition:Costs are the financial consequences related to the use of resources

• Difference between:– investments (once-only)– operational costs (several times)

• Principle of marginal costs:Which resources would not be used if the project was not realised

Classification of operational costs

• Maintenance• Consumables• Labour• Taxes and levies• Management costs• Overhead costs• Contingency costs (underestimations)

Examples of benefits and costs of agricultural projects

Costs

• Physical production inputs

• Labour

• Land

• Contingency allowances

• Taxes

• Financial costs

Benefits

• Tangible benefits– Increased production– Improved quality– Time and location of sale– Product shape, lifetime– Reduced costs (transport,

mechanise)– Reduced losses

• Intangible– New job opportunities– Better health, reduced mortality– National integration

Phased costs and benefits

• Important to know the phased costs and benefits in time = cash flow

• Cash flow is the basis of:– Financial planning– The balance of costs and benefits in the financial

analysis– Basis for the estimation of the economic costs and

benefits (corrections needed)– Financing with loans, participations, subsidies,

advances

Amount(constant price)

0

Time (years)5 10 15 20

Capital costs (project investments)

Recurrent costs (project operation)

Cash flow

1

2

3

-1

-2

-3

investment

returns

Time (years)1 2 3 4 5 6 7 8 9 10

Cash flow

• Difference between earnings and expenditures of operational activities, supplemented with the current of capital within the project

• Earnings and expenditures• Financing + expenditures of capital• Total cash flow

Net present valueNPV

Internal rate of return IRR

Payback criterium

Benefit/cost ratio