Benefit-Cost Analysis: Financial and Economic Appraisal by Harry F. Campbell, Richard P.C. Brown

By Harry F. Campbell, Richard P.C. Brown

In the course of the textual content of this advent to profit expense research, emphasis is on purposes, and a labored case learn is gradually undertaken for instance of the analytical rules in operation. the 1st half covers easy thought and tactics. half advances to fabric on across the world tradeable items and initiatives that impact marketplace costs, and half 3 introduces certain issues reminiscent of the remedy of possibility and uncertainty, source of revenue distributional results and the valuation of non-marketed items.

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It has been suggested that the analyst may be able to help the client formulate a better proposal – one which has a higher net present value to the referent group than the original proposal – although this does not guarantee that the revised project can be recommended on efficiency grounds. However the analyst may also be able to assist with the income distributional aspects of the project: these are sometimes difficult to identify and may emerge only during the drafting of the report. At this stage the analyst may be in a position to suggest measures which may offset the losses which some sub-groups would experience if the proposal went ahead.

B1 can be discounted to a present value using the interest rate in year 1: NPV = –K + B1/(1+r1) + B2/[(1+r1)(1+r2)] In practice it is almost invariably assumed that the rate of interest is constant over time, so that r1=r2=r, in which case the NPV formula reduces to: NPV = –K + B1/(1+r) + B2/(1+r )2. 1)2 are obtained from a Table of Discount Factors, or by using a pocket calculator. 84. 5. 5. It can be calculated by solving the following equation for rp: –K + B1/(1+rp) + B2/(1+rp)2 = 0. Multiplying both sides of this equation by (1+rp)2 gives an equation of the following form: –Kx2 + B1x+ B2 = 0, where x = (1+rp).

From the individual’s point of view the rate of interest offered by the bank is the opportunity cost of the funds to be invested – if she decided not to refurbish the house she could earn interest on her money in the bank. In the wider economy the market rate of interest also measures the opportunity cost of funds since some investor is willing to borrow at that rate (otherwise it wouldn’t be the market rate of interest); this means that if the NPV of the proposed project being appraised by the investor is positive using the market rate of interest as the discount rate, the present value of the benefits of the investor’s project is greater than its opportunity cost.

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