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EFE - MSESPM - Lec 13 - Benefit-Cost Analysis - 2019

This document discusses benefit-cost analysis for public sector projects. It explains that benefit-cost analysis determines if social benefits outweigh social costs. There are three types: maximizing benefits over costs, maximizing net benefits when benefits and costs vary, and minimizing costs for a given benefit level. The framework identifies user benefits and sponsor costs, quantifies them in rupee terms, determines equivalent benefits and costs using a social interest rate, and accepts projects where benefits exceed costs. Key metrics like benefit-cost ratio, incremental analysis, economic net present value, and economic internal rate of return are also outlined.

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Raut Sumesh
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55 views14 pages

EFE - MSESPM - Lec 13 - Benefit-Cost Analysis - 2019

This document discusses benefit-cost analysis for public sector projects. It explains that benefit-cost analysis determines if social benefits outweigh social costs. There are three types: maximizing benefits over costs, maximizing net benefits when benefits and costs vary, and minimizing costs for a given benefit level. The framework identifies user benefits and sponsor costs, quantifies them in rupee terms, determines equivalent benefits and costs using a social interest rate, and accepts projects where benefits exceed costs. Key metrics like benefit-cost ratio, incremental analysis, economic net present value, and economic internal rate of return are also outlined.

Uploaded by

Raut Sumesh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Economic Analysis in the

Public Sector
MSREE
Lecture 13
Amrit Nakarmi
Energy Financial Management
CES
19 Feb 2019

06/13/2020 1
Benefit –Cost Analysis
The objective of private investment is to increase the
net worth of the company
In the public sector, government spend a lot of money
on projects such as education, health, infrastructure –
road construction, airport construction, water
pipeline, irrigation systems, and hydropower plants
etc.

06/13/2020 2
Benefit –Cost Analysis
Benefit –cost Analysis is a decision-making tool for
systematically developing useful information about
desirable or undesirable effects of a public project.
Benefit-cost Analysis tries to determine whether the
social benefits are greater than social costs.

06/13/2020 3
Benefit –Cost Analysis
There are three types of benefit –cost Analysis
To maximize benefits over any costs
To maximize net benefits when benefits and costs vary
To minimize costs to get a certain level of benefits

06/13/2020 4
Framework of Benefit –cost Analysis
Identify users’ benefits from the projects
Quantify, as much as possible, benefits in Rupee
term
Identify sponsors’ costs
Quantify, as much as possible, social costs in
Rupee term
Determine the equivalent benefits and costs at the
base period using social interest rate
Accept the project if the equivalent users’ benefits
exceed the sponsors’ costs
06/13/2020 5
Social Benefits
Benefits due to reduction of deaths
Benefits due to reduction of damage to property
Primary users’ disbenefits (need to be deducted)

B =B1 + B2- DB

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Social Costs
Primary sponsors’ costs
Primary sponsors’ savings ( need to be deducted)

C =C1 + C2- S

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Benefit –Cost Ratio
We need to consider social benefits and costs of
primary effects and secondary effects

B – C should be positive

06/13/2020 8
Benefit –Cost Ratio
If B and C are the present values of benefits and costs,
then
B =Σ Bn (1+i)-n
C = Σ Cn (1+i)-n
The sponsors’ costs consist of the equivalent capital (I)
and equivalent annual operating costs (C’), then

06/13/2020 9
Benefit –Cost Ratio
I =Σ cn (1+i)-n
C’ =Σ Cn (1+I)-n
Here, C =I+C’
BC(i) = B/C= B/(1+C’)>1
An alternative measure,
net B/C =(B –C’)/I>1, where I>0

06/13/2020 10
Incremental Analysis
For selecting public projects from mutually exclusive
projects, we must do incremental analysis.
Computing the incremental differences for each of B,
I, and C
ΔB =Bk – Bj
ΔI =Ik – Ij
ΔC =Ck – Cj

06/13/2020 11
Incremental Analysis
ΔBC (i)k-j = ΔB/(ΔI+ ΔC) >1, then select project ‘k’
If ΔI+ ΔC =0, we cannot use this formula

06/13/2020 12
ENPV & EIRR
For economic analysis
Economic NPV (ENPV)>=0
Economic IRR (EIRR)>=0

06/13/2020 13
Levelized cost of electricity (LCOE)

Where
Lcoe levelized cost of electricity in NR/kWh
Capex Capital cost (expenditure) in NR
Opex Annual Operating and maintenance cost
(expenditure) in NR
R Discount rate
Ei Electricity generated in year ‘ i’ (kWh)
N Service life of the plant in years

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