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Cost-Benefit Analysis for Investment Decisions: Chapter 7 (Principles Underlying The Economic Analysis of Projects)

Author

Listed:
  • Glenn Jenkins

    (Queen's University, Canada and Eastern Mediterranean University, Cyprus)

  • Chun-Yan Kuo

    (Queen's University, Canada)

  • Arnold C. Harberger

    (University of California, Los Angeles, USA)

Abstract

While the financial analysis of a project focuses on matters of interest to investors, bankers, public sector budgets, etc., an economic analysis deals with the impact of the project on the entire society. The primary difference between the economic and financial evaluation is that the former aggregates benefits and costs over all the country's residents to determine whether the project improves the level of economic welfare of the country as a whole while the latter conside'rs the project from the point of view of the well-being of a particular institution or subgroup of the population. A broad consensus exists among accountants on the principles to be used in undertaking a financial appraisal of a potential investment. There is also considerable agreement among financial analysts on the cash flow and balance sheet requirements for a public sector project to pay for itself on a cash basis. However, these accounting and financial principles are not a sufficient guide for undertaking an economic appraisal of a project. This chapter explains the relationship between the financial and the evaluations and how the economics is grounded in microeconomic theory and it applications in welfare economics.

Suggested Citation

  • Glenn Jenkins & Chun-Yan Kuo & Arnold C. Harberger, 2011. "Cost-Benefit Analysis for Investment Decisions: Chapter 7 (Principles Underlying The Economic Analysis of Projects)," Development Discussion Papers 2011-07, JDI Executive Programs.
    • Handle: RePEc:qed:dpaper:2000
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    References listed on IDEAS

    as
    1. Harberger, Arnold C, 1984. "Basic Needs versus Distributional Weights in Social Cost-Benefit Analysis," Economic Development and Cultural Change, University of Chicago Press, vol. 32(3), pages 455-474, April.
    2. Arnold C Harberger & Glenn P Jenkins & Chun‐Yan Kuo & M Benjamin Mphahlele, 2003. "The Economic Cost of Foreign Exchange for South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 71(2), pages 155-169, June.
    3. Harberger, Arnold C, 1978. "On the Use of Distributional Weights in Social Cost-Benefit Analysis," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 87-120, April.
    4. Jenkins, G.P., 1998. "Evaluation of Stakeholder Impacts in Cost-Benefit Analysis," Papers 631, Harvard - Institute for International Development.
    5. Harberger, Arnold C, 1971. "Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay," Journal of Economic Literature, American Economic Association, vol. 9(3), pages 785-797, September.
    6. Carliss Baldwin & Donald Lessard & Scott Mason, 1983. "Budgetary Time Bombs: Controlling Government Loan Guarantees," Canadian Public Policy, University of Toronto Press, vol. 9(3), pages 338-346, September.
    7. Glenn Jenkins & Henry Lim, 1999. "An Integrated Analysis of a Power Purchase Agreement," Development Discussion Papers 1999-08, JDI Executive Programs.
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    More about this item

    Keywords

    economic evaluation; financial appraisal; net cash flow; willingness to pay; economic resource cost;
    All these keywords.

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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    This paper has been announced in the following NEP Reports:

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