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1. INTRODUCTION
Project Formulation and Appraisal play a critical role in entrepreneurship
development and enterprise creation. Most rejections and failures of project
proposals are due to improper business planning. Varying appraisal methods and
project formats (varying from bank to bank and financial institution to financial
institution) compound the complexity. Formulating viable project reports for small,
micro, village and cottage industry is a fine art requiring skills different from what is
needed in case of large and medium enterprises. Though a good project report is
the heart of entrepreneurship, potential entrepreneurs lack formulating skills and
their trainerpromoters, knowledge of training/consulting methods. Even
experienced trainers/consultants are often unclear on the treatment required fordifferent projects: industry, service or business.
Project Analysis is done to Estimate, Compare, and Rank the project net benefits
among different alternatives with budget constraints. Project appraisal is a generic
term that refers to the process of assessing, in a structured way, the case for
proceeding with a project or proposal. In short, project appraisal is the effort of
calculating a project's viability. It often involves comparing various options, using
economic appraisal or some otherdecision analysis technique. The economic and
financial appraisals (ex-anti evaluation) are considered to be the most important
tools for helping decision maker to choose or select.
2. WHAT IS A PROJECT?
"A project is a group of activities which can be planned, financed (funded),
implemented, and analyzed as a unit".
In project management, a project consists of a temporary endeavor undertaken to
create a unique product, service or result. Another definition is a management
environment that is created for the purpose of delivering one or more business
products according to a specified business case.
Project objectives define target status at the end of the project, reaching of which is
considered necessary for the achievement of planned benefits. They can be
formulated as SMART criteria: Specific, Measurable (or at least evaluable)
achievement, Achievable (recently Agreed-to or Acceptable are used regularly as
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well), Realistic (given the current state of organizational resources) and Time
terminated (bounded). The evaluation (measurement) occurs at the project closure.
However a continuous guard on the project progress should be kept by monitoring
and evaluating. It is also worth noting that SMART is best applied for incremental
type innovation projects. For radical type projects it does not apply as well. Goals
for such projects tend to be broad, qualitative, stretch/unrealistic and success
driven.
The project in general includes the following factors
(a) OutflowsAlso known as; inputs, resources, costs or investments
(b) InflowsAlso known as: output, production, benefits or revenues.
(c) Life span of the projectThe time or the life of the project. It is a specific activity(ies) with a specificstarting point and specific ending point intended to accomplish a specificobjective(s).
(d) A spaceA geographical location or a place with a boundary forming the project space
(e) The managementThe administrative structure, the individuals (coop., corp., entities) and theparticipants.
It is better to keep the project close to the minimum size that is economically,technically, and administratively feasible
3. THE PROJECT CYCLE
The project cycle comprises of (i) Project Identification, (ii) Project Preparation or
Formulation (feasibility studies), (iii) Project Appraisal (Ex-ante Evaluation), (iv)
Project Implementation, and (v) Project Evaluation (Ex-post Evaluation).
(i) Project Identification
Any project starts with an idea, which leads the identification of the relationship
between the idea and the sector plan, then with the national plan as a whole which
also includes the identification of the opportunity cost of the alternative investments
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(ii) Project Preparation or Formulation (feasibility studies)
This stage includes the different feasibility studies such as:
(a) Technical feasibility
(b) Commercial feasibility (marketing study)
(c) Financial feasibility
(d) Economic feasibility, and etc.
This stage ends with a project report
(iii) Project Appraisal (Ex-ante Evaluation)
It includes economic, financial, and social evaluation for the project before its
implementation to have enough understanding whether the project is feasible or
not.
(iv) Project Implementation
This stage includes observing the project scheduling, supervising, and control the
different stages. Also to record what has happened in each stage of the project
implementation (project reporting, or sometime known as follow up reports).
(v) Project Evaluation (Ex-post Evaluation)
It includes the financial, economic, and social evaluation after the project is
implemented. The difference between Stages 3 and 5 (even the used measures
are the same) is that: in stage 3 (the Appraisal stage) is estimated but stage 4 is
what actually happened (The Evaluation Stage).
4. ASSESSMENT AND APPRAISAL OF A PROJECT
The following are the common steps for the Assessment and Appraisal of any
project
Identify the project costs and benefits
Quantify the project costs and benefits
Conduct a cost-benefit analysis
Assess the economic and financial feasibility of the project by estimating the
various profitability indicators of the project
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Conduct sensitivity analysis scenarios, whenever needed.
Accept or reject a project or a set of project according to a set of choice
criteria
The two techniques for the assessment and appraisal of the projects are (i) Non-
Discounted Technique and (ii) Discounted Technique.
(i) Non-Discounted Technique
Non-discounted technique of Capital Budgeting refers to the technique or method
of investment decision where it is considered that there is no change in the price
level between the initial investment made and the date of last return from the
investment. Under this technique, the future value of money is considered at the
current value.
The non-discounted techniques are as follows:-
(a) Pay Back Period (PBP) Method
Pay Back Period refers to the period (generally number of years) of an investment
project proposal at which the firm expects to recover its initial investment to the
project proposal. Alternatively the PBP is the period at which the total cash inflow
from a project equals to the initial investment (i.e. cash outflows) made to theproject.
Computation of PBP
(i) When the Cash Inflows After Tax (CFAT) are constant every year
PBP = Initial Investment / Constant CFAT per annum
(ii) When CFAT are not constant every year, the following steps are to be
followed :
Step 1:- Calculate the CFAT of each year
Step 2:- Compute the cumulative CFAT
Step 3:- The time (i.e. year) when the cumulative CFAT becomes equal to
the initial investment would be the PBP or else, use the method of
interpolation.
Under this method, the project having the shortest PBP should be undertaken
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(b) Pay Back Profitability Method
Pay Back Profitability is the amount of cash flows earned from a project after its
Pay Back Period. Alternatively, it is the excess of cash inflows from a project over
the initial investment into the project. It represents the net cash inflows from the
project proposal.
Computation of Pay Back Profitability(i) When (CFAT) are constant every year
Pay Back Profitability = (Expected life of the project PBP) x CFAT
(ii) When CFAT are not constant every year
Pay Back Profitability = Total CFAT Initial Investment
(c) Average Rate of Return (ARR) Method
ARR is the method ofinvestment appraisal which determines return on
investment by totaling the cash flows (over the years for which
the money was invested) and dividing that amount by the numberof years.
The average rate of return does not assure that the cash inflows are the
same in a given year; it simply guarantees that the return averages out to
the average rate of return.
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Average Investment =Original Investment - Salvage Value
2+ Salvage Value
Average Investment =Original Investment + Salvage Value
2
Average Annual Profit =Total of after Tax Profit of all the year
No. of yearsx 100
ARR =Average annual Profit after Tax
Average Investment x 100
Assignment for PGPM 21
This method is based on accounting information rather than cash flows.
There are various ways of calculating Average Rate of Return. It can be
calculated as:-
If working Capital is also required in the initial year of the project, the
average investment will be= Net working Capital + Salvage value + (initial
cost of Machine- Salvage Value).
In another method instead of average investment original cost is used.
In this method, to evaluate the project all those projects are accepted on
which average rate of return is more than the predetermined rate. Thus, the
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project is given more significant on which the average rate of return is the
highest.
Acceptance Rule
Accept if ARR > minimum rate.
Merits
1) Easy to understand. Necessary information to calculate average rate
of return are available easy.
2) This method takes into account all the profits during the life time of
the project, whereas pay back period ignores the profits accruing after
the pay back period.
3) Give more weightage to future receipts.
4) Easy to understand and calculate.
5) Uses accounting data with which executives are familiar.
Demerits
1) Ignore the time value ofmoney.
2) Does not use cash flow.
3) No objective way to determine the minimum acceptable rate ofreturn.
4) This method does not account for the profits arising on sale of profit
on old machinery on replacement.
5) ARR method does not consider the size of investment for each
project. It may be time that the competing ARR of two projects may
be the same but they may require different average investments. It
becomes difficult for the management to decide which project should
be implemented.
(ii) Discounted Technique
Discounted Technique is a method of investment analysis in which anticipated
future cash income from the investment is estimated and converted into a rate of
return on initial investment based on the time value of money. In addition, when a
required rate of return is specified, a net present value of the investment can be
estimated.
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The discounted techniques are as follows:-
(a) Discounted Pay Back Period (PBP) Method
The discounted payback period is the amount of time that it takes to cover
the cost of a project, by adding positive discounted cash flowcoming from
the profits of the project.
In investment decisions, the number of years it takes for an investment to
recover its initial cost after accounting forinflation, interest, and other
matters affected by the time value of money, in order to be worthwhile to
the investor. It differs slightly from the payback period rule, which only
accounts forcash flows resulting from an investment and does not take into
account the time value of money. Each investor determines his/her own
discounted payback period rule and, as such, it is a highly subjective rule. In
general, however, short-term investors use a short number of years, or even
months, for their discounted payback period rules, while long-term investors
measure their rules in years or even decades.
(b) Profitability Index (PI) Method
Profitability Index (PI) is the ratio of the Present Value (PV) of the total cash
inflows from a project and the PV of the total cash outflows for the project. PI
is also called the benefit-cost ratio.
PI = PV of total cash inflowsPV of total cash outflows
If PI is less than 1, accept the project proposal,
If PI is greater than 1, reject the project proposal
If PI is equal to 1, the management may be indifferent in accepting or
rejecting the project proposal. Generally the project proposal is rejected in
such a case as the firm does not get the net benefit from it.
(c) Net Present Value (NPV) Method
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Net Present Value (NPV) is the difference between the PV of the total cash
inflows from a project and the PV of the total cash outflows for the
project.
NPV = Total of PV of cash Inflows - Total of PV of cash outflows
(i.e., the total of discounted cash inflows - the total of discounted cash
outflows
Following steps are to be followed for determining the NPV:
Step 1: Calculate the CFAT of each year
Step 2: Multiply the CFAT of each year by the respective PV factor and get
the discounted CFAT or PV of CFAT.
Step 3: Compute the cumulative discounted CFAT
Step 4: Compute the PV of cash outflows.
Step 5: Calculate the NPV by deducting the PV of the total cash outflows
from the PV of the total cash inflows.
Decision-Making Criterion
i. In case of a single project proposal, accept it if NPV > 0; else
reject it.ii. In case of two mutually exclusive project proposals, accept the
project having the higher NPV.
(d) Internal Rate of Return (IRR) Method
Internal Rate of Return (IRR) is the rate of return which equates the PV of
the total cash inflows with the PV of the total cash outflows. Therefore, IRR
is the rate of return (i.e. the discounting factor) which makes the NPV zero.
At the IRR, PV of total cash inflows = PV of total cash outflows
Hence, PI = 1.
Decision-Making Criterion
iii. In case of a single project proposal, accept it if the IRR
exceeds the cost of capital.
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iv. In case of two mutually exclusive project proposals, accept the
project having the higher IRR.
ASSUMING THE FOLLOWING HYPOTHETICAL WATER RESERVOIR PROJECT
A water reservoir project to irrigate agricultural land that used to be in rain fed was
designed. The estimated costs and benefits of the project in millions of US $ are displayed
in Table 1.
The task is to calculate the project NPV, BCR at 10% Discounted rate. In addition, we
need to determine the project IRR.
Table 1: The annual estimated costs and benefits for the project
Year Investment O&M Total Cost Benefits($) ($) ($) ($)1 15.00 2.00 17.00 5.002 10.00 2.50 12.50 8.003 10.00 3.00 13.00 11.004 0.00 5.00 5.00 15.005 0.00 5.00 5.00 15.006 12.00 5.00 17.00 10.007 0.00 5.00 5.00 15.008 0.00 5.00 5.00 15.009 0.00 5.00 5.00 15.0010 0.00 5.00 5.00 15.00
Total 47.00 42.50 89.50 124.00
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Solution :-
Table 2: The Project NPC and BCR as 10% Discount Rate
Year Investment O&M TotalCost
Benefits DF D Cost DBenefit
NPV
($) ($) ($) ($) 10% ($) ($) ($)
1 15.00 2.00 17.00 5.00 0.909091 15.45 4.55
-
10.9
0
2 10.00 2.50 12.50 8.00 0.826446 10.33 6.61 -3.723 10.00 3.00 13.00 11.00 0.751315 9.77 8.26 -1.514 0.00 5.00 5.00 15.00 0.683013 3.42 10.25 6.835 0.00 5.00 5.00 15.00 0.620921 3.1 9.31 6.216 12.00 5.00 17.00 10.00 0.564474 9.6 5.64 -3.967 0.00 5.00 5.00 15.00 0.513158 2.57 7.70 5.138 0.00 5.00 5.00 15.00 0.466507 2.33 7.00 4.679 0.00 5.00 5.00 15.00 0.424098 2.12 6.36 4.24
10 0.00 5.00 5.00 15.00 0.385543 1.93 5.78 3.85
Tot
al 47.00 42.50 89.5 124.00 60.62 71.4610.8
4
Benefit Cost Ratio = 71.46 / 60.62 = 1.179
NPV = 10.84
Table 3: The Project NPC and BCR as 20% Discount Rate
Year Investment O&M TotalCost
Benefits DF D Cost DBenefit
NPV
($) ($) ($) ($) 20% ($) ($) ($)
1 15.00 2.00 17.00 5.00 0.833333 14.17 4.17
-
10.0
0
2 10.00 2.50 12.50 8.00 0.694444 8.68 5.56 -3.123 10.00 3.00 13.00 11.00 0.578704 7.52 6.37 -1.154 0.00 5.00 5.00 15.00 0.482253 2.41 7.23 4.825 0.00 5.00 5.00 15.00 0.401878 2.01 6.03 4.026
12.00 5.00 17.00 10.00 0.3348985.69 3.35 -2.34
7 0.00 5.00 5.00 15.00 0.279082 1.40 4.19 2.798 0.00 5.00 5.00 15.00 0.232568 1.16 3.49 2.339 0.00 5.00 5.00 15.00 0.193807 0.97 2.91 1.94
10 0.00 5.00 5.00 15.00 0.161506 0.81 2.42 1.61Tot
al 47.00 42.50 89.5 124.00 44.82 45.72 0.90
Benefit Cost Ratio = 45.72 / 44.82 = 1.020
NPV = 0.90
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Table 4: The Project NPC and BCR as 30% Discount Rate
Year Investment O&M TotalCost
Benefits DF D Cost DBenefit
NPV
($) ($) ($) ($) 30% ($) ($) ($)1 15.00 2.00 17.00 5.00 0.769231 13.08 3.85 -9.232 10.00 2.50 12.50 8.00 0.591716 7.4 4.73 -2.673 10.00 3.00 13.00 11.00 0.455166 5.92 5.01 -0.914 0.00 5.00 5.00 15.00 0.350128 1.75 5.25 3.505 0.00 5.00 5.00 15.00 0.269329 1.35 4.04 2.696 12.00 5.00 17.00 10.00 0.207176 3.52 2.07 -1.457 0.00 5.00 5.00 15.00 0.159366 0.8 2.39 1.598 0.00 5.00 5.00 15.00 0.122589 0.61 1.84 1.239 0.00 5.00 5.00 15.00 0.094300 0.47 1.41 0.94
10 0.00 5.00 5.00 15.00 0.072538 0.36 1.09 0.73Tot
al 47.00 42.50 89.5 124.00 35.26 31.68-
3.58
Benefit Cost Ratio = 31.68 / 35.26 = 0.8985
NPV = -3.58
Table 5: INTERNAL RATE OF RETURN
Year Investment O&M TotalCost
Benefits DF D Cost DBenefit
NPV
($) ($) ($) ($) 21.40% ($) ($) ($)
1 15.00 2.00 17.00 5.00 0.823723 14 4.12 -9.882 10.00 2.50 12.50 8.00 0.67852 8.48 5.43 -3.053 10.00 3.00 13.00 11.00 0.558913 7.27 6.15 -1.124 0.00 5.00 5.00 15.00 0.460389 2.3 6.91 4.615 0.00 5.00 5.00 15.00 0.379233 1.9 5.69 3.796 12.00 5.00 17.00 10.00 0.312383 5.31 3.12 -2.197 0.00 5.00 5.00 15.00 0.257317 1.29 3.86 2.578 0.00 5.00 5.00 15.00 0.211958 1.06 3.18 2.129 0.00 5.00 5.00 15.00 0.174595 0.87 2.62 1.75
10 0.00 5.00 5.00 15.00 0.143818 0.72 2.16 1.44Tot
al 47.00 42.50 89.5 124.00 43.20 43.24 0.04
Benefit Cost Ratio = 43.24 / 43.20 = 1.0009
NPV = 0.04
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INCREASING THE DIMENSIONS OF PROJECTS FEASIBILITY AND APPRAISAL
The following issues are becoming increasingly crucial factors in assessing and
determining the feasibility of a project or a set of projects
1. The environmental impact of the project
2. The interdependencies among projects
3. Fund limitations (Capital Constraint)
From scenic beauty and recreational opportunities to direct inputs into the production
process, environmental resources provide a complex set of values to individuals and
benefits to society. Coastal areas, for example, offer scenic panoramas and radiant
sunsets. Fish and other edible sea life caught in coastal areas provide a rich and nutritious
source of food to consumers. Beaches are also excellent recreation areas, used for
relaxation, exercise, or bird watching. These are only the direct benefits. There are also
values that are not directly tied to use, such as climate modulation, physical protection,
and stewardship for future generations. All of these benefits are relevant in environmental
valuation.
Environmental Values
Use values, such as fishing and hiking, are the more direct and quantifiable category of
environmental values, but they capture only a portion of the total economic value of an
environmental asset. Indirect-use values, non-use values, and intrinsic values are also
associated with preserving environmental resources. Total economic value is represented
by the following equation:
Total economic value = direct-use value + indirect-use value + non-use value + intrinsic
value
Indirect-use values associated with coastal areas include biological support, physical
protection, climate modulation, and global life support. Non-use values are less direct, less
tangible benefits to society and include option and existence values. The option value is
the value an individual places on the potential future use of the resource, for example,
benefits a beach would offer during future trips to the coastal area. Existence values
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include bequest, stewardship, and benevolence motives. Bequest value is the satisfaction
gained through the ability to endow a natural resource on future generations. The
stewardship motive is derived from an altruistic sense of responsibility toward the
preservation of the environment and a desire to reduce environmental degradation. The
benevolence motive reflects the desire to conserve an environmental resource for
potential use by others. Finally, the intrinsic value of nature reflects the belief that all living
organisms are valuable regardless of the monetary value placed on them by society.
It is important to note that there are certain environmental assets that are absolutely
essential to the support of animal life, and that the total value of these assets is not
definable. Marginal changes, however, in the productivity and security of even
irreplaceable environmental assets (e.g., the degradation of part of a large ecosystem or
environmental resources essential to human life) can be captured in terms of total
economic value. For example, the total economic value of air and water quality are
immeasurably large because extreme degradation of either would result in irreversible and
catastrophic damage to the capacity of this planet to support human and other life.
However, we can observe the finite value that society places on small losses of even
those assets that are absolutely essential for sustaining life. For instance, society has
proven willing to accept some degradation of air quality to improve the efficiency and
convenience of transportation. In this particular example, individual choices are not a good
indicator of the value of air quality since most of the costs of reduced air quality are
externalized or passed on to others
Methods for Valuing the Environment
Environmental valuation is largely based on the assumption that individuals are willing to
pay for environmental gains and, conversely, are willing to accept compensation for some
environmental losses. The individual demonstrates preferences, which, in turn, place
values on environmental resources. That society values environmental resources is
certain; monetizing the value placed on changes in environmental assets such as coastal
areas and water quality is far more complex. Environmental economists have developed a
number of market and non-market-based techniques to value the environment. Figure 2
presents some of these techniques and classifies them according to the basis of the
monetary valuation, either market-based, surrogate market, or non-market-based.
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Figure 2. Environmental Valuation Methods
Market-Based Methods Economists generally prefer to rely on direct, observable market
interactions to place monetary values on goods and services. Markets enable economists
to measure an individual's willingness to pay to acquire or preserve environmental
services. In turn, consumers reveal their preferences through the choices they make inallocating scarce resources among competing alternatives. There are a number of market-
based methods of environmental valuation. This article identifies and discusses three
market-based techniques: a) factor of production approach, b) change in
producer/consumer surplus, and c) examination of defensive expenditures.
The value of a natural resource can be monetized based on its value as a factor of
production. An Economic View of the Environment notes that the output of any firm is a
function of several important inputs (e.g., land, capital, natural resources), which are
collectively known as "factors of production." In their role as factors of production, raw
materials and environmental inputs are used in the production of other goods. When a
natural resource has direct value as a factor of production and the impact of
environmental degradation on future output of that resource can be accurately measured,
the resultant monetary value of the decline in production or higher cost of production can
be measured. For example, a decline in water quality could have a direct and detrimental
impact on the productivity and health of shellfish beds. This technique is methodologically
straightforward; however, it is limited to those resources that are used in the production
process of goods and services sold in markets. Because many goods and services
produced by the environment are not sold in markets, the factor of production method
generally fails to capture the total value of the resource to society.
A final market-based valuation method is that ofdefensive expenditures, which are
made on the part of industry and the public either to prevent or counteract the adverseeffects of pollution (Feather 1995) or other environmental stressors. The defensive
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expenditures method, also known as the averting behavior approach, monetizes an
environmental externality by measuring the resources expended to avoid its negative
impacts on a surrounding community. Types of defensive expenditures include water
purification devices, beach nourishment, and replanting seagrasses.
Surrogate Market Methods. In the absence of clearly defined markets, the value of
environmental resources can be derived from information acquired through surrogate
markets. The most common markets used as surrogates when monetizing environmental
resources are those for property and labor. The surrogate market methods discussed
below are the hedonic price method and the travel cost method, with a brief look at the
use of random utility models for environmental valuation.
The hedonic price method of environmental valuation uses surrogate markets for placing
a value on environmental quality. The real estate market is the most commonly used
surrogate in hedonic pricing of environmental values. Air, water, and noise pollution have
a direct impact on property values. By comparing properties with otherwise similar
characteristics or by examining the price of a property over time as environmental
conditions change and correcting for all non-environmental factors, information in the
housing market can be used to estimate people's willingness to pay for environmentalquality.
The travel cost method is employed to measure the value of a recreational site by
surveying travelers on the economic costs they incur (e.g., time and out-of-pocket travel
expenses) when visiting the site from some distance away. These expenditures are
considered an indicator of society's willingness to pay for access to the recreational
benefits provided by the site.
Non-Market Methods. The Contingent Valuation Method (CVM) is a non-market-based
technique that elicits information concerning environmental preferences from individuals
through the use of surveys, questionnaires, and interviews. When deploying the
contingent valuation method, the examiner constructs a scenario or hypothetical market
involving an improvement or decline in environmental quality. The scenario is then posed
to a random sample of the population to estimate their willingness to pay (e.g., through
local property taxes or utility fees) for the improvement or their willingness to acceptmonetary compensation for the decline in environmental quality. The questionnaire may
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take the form of a simple open-ended question (e.g., how much would you be willing to
pay) or may involve a bidding process (e.g., would you accept $10, would you accept $20)
or take-it-or-leave-it propositions. Based on survey responses, examiners estimate the
mean and median willingness to pay for an environmental improvement or willingness to
accept compensation for a decline in environmental quality.
Conclusion
Environmental valuation techniques are primarily driven by the principle that individuals
are self-interested and demonstrate preferences that form the basis of market interactions.
These market interactions demonstrate how individuals value environmental goods and
services. The market-based nature of economic theory emphasizes the maximization of
human welfare. The market, in turn, determines resource allocation based on the forces of
supply and demand.
The environment, thus, is used as an instrument to achieve human satisfaction. In turn,
the environment can be treated like any other commodity and its associated value can be
broken down into many elements. For example, the value of coastal areas could be
theoretically quantified based on the value of the products it offers (e.g., fish, crabs, clams,
recreation, and bird watching). In this manner, environmental valuation can be viewed asa mechanistic approach in which the total value of an environmental system is assessed
in terms of the value of its individual parts.
Existence values are not demonstrated in the marketplace and are at least somewhat
based on unselfish motives making them problematic to environmental analysts. To
quantify existence values accurately within the framework of environmental valuation is
difficult. Revealed preference methods (e.g., travel cost method and hedonic pricing
methods) measure the demand for the environmental resource by measuring the demand
for associated market goods. Existence values are not adequately captured using these
methods. Existence values are only revealed through surveys of individual willingness to
pay for the environmental resource or willingness to accept compensation for
environmental losses.
THE FINANCIAL \ ECONOMIC ACCEPTANCE CRITERIA
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1) Net Present Value (NPV):One project
accept if NPV >= 0
Many project (set of projects)Most to least NPV values to rank project
choose until budget is exhausted.
2) Benefit to Cost Ratio (BCR)One project
accept if BCR >= 1
Many project (set of projects)Most to least BCR values to rank project
choose until budget is exhausted.
FORMAL DECISION TREE FOR ACCEPTING PROJECTS
(INDEPENDENT Vs. DEPENDENT)
Decision State ofDependence
Constraint Criterion
Accept One Project NPV > 0Accept One of
Several Projects
Maximize NPV
Accept few of manyprojects
Independent Capital Constraint Rank by BCR
No Capital Constraint Rank by NPV > 0
Dependent Capital Constraint Find feasible setsmaximize NPV given
your budget constraintNo Capital Constraint Find possible sets
maximize NPV (all
projects with NBV >=Zero)
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