Learning objectives of this chapter include: Distinguish between the private and public sector approaches to project evaluation; explain the net present value approach to project evaluation and compare it with the internal rate of return and the benefit-cost ratio; show why, under ideal conditions, public sector projects should strive to maximise consumer (and producer) surplus;...
• • • • • • Distinguish between the private and public sector approaches to project evaluation Explain the net present value approach to project evaluation and compare it with the internal rate of return and the benefit-cost ratio Show why, under ideal conditions, public sector projects should strive to maximise consumer (and producer) surplus Explain the meaning of shadow prices and comment on some of the difficulties involved in quantifying benefits and costs Discuss the importance of the social discount rate in determining the net present value of a public project Indicate how risk factors can be taken into account in project evaluation Cost-benefit analysis (CBA) is an analytical tool used to evaluate the relative merits of public projects financed by the state It differs from evaluation techniques used in the private sector because it strives to maximise something other than monetary profits (or the difference between private benefits and private costs) • Net present value (NPV) – – – Discount rate • Internal rate of return (IRR) – • Benefit-cost (B-C) ratio • • • • • • • • Private costs Technological externalities Shadow prices Labour Non-labour inputs Indirect taxes and subsidies Price variation Pecuniary external effects – Adjusted marginal private cost • • Questionnaire studies Contingencies • • • Insufficient investment Current and future generations Risk ... of a public project Indicate how risk factors can be taken into account in project evaluation Cost-benefit analysis (CBA) is an analytical tool used to evaluate the relative merits of public. .. rate • Internal rate of return (IRR) – • Benefit-cost (B-C) ratio • • • • • • • • Private costs Technological externalities Shadow prices Labour Non-labour inputs Indirect taxes and subsidies Price... private and public sector approaches to project evaluation Explain the net present value approach to project evaluation and compare it with the internal rate of return and the benefit-cost ratio