Project Analysis

The project analyst has to be analyzed

whether the selected project would
economically beneficial or not in the
selection process.
•Identify the economic costs and
benefits;
•Quantify the costs and benefits, as
much as possible;
•Value the costs and benefits; and
•Compare the benefits with the costs.
 The conceptual framework of project
analysis
• Directly productive projects for which a direct
market demand exists for valuing project output.
• Indirectly productive projects for which demand
is derived from non market goals.
• The integrated approach to project appraisal
helps to prevent the misallocation of resources.
This view provides a framework for identifying
and comparing alternative means of achieving
objectives. This is an appraisal tools, which
analyzes the means ends relationships, input
output linkage.
 Identifying Project Costs and Benefits

• There may have various nature of project in a

society such as economic, social, judicial and
so on.
 There are some key questions in identification of
costs and benefits of project.

• Have the without and with project situations

both have been described?
• Have all project costs, comparing with and
without project situations been identified?
• Have all project benefits, comparing with and
without project situations been identified?
• Which benefits have been quantified and
valued and which have not?
• The options to choose one among the
alternatives project is determined after
project analysis. The more acceptable returns
is determine by the analysis of project's costs
and benefits.
 Objectives, Costs and Benefits
• Gittinger rightly states that "Simply put, a cost
is anything that reduces objective, and a
benefit is anything that contributes to an
objective".
• The aggregate consumption, income
redistribution, growth rate of national income,
employment level, self reliance, and merit
wants may be areas and issues according to
which we determine the project's objective.
 broader objective of a project

• Desire to increase regional integration

• To upgrade the general level of education to
improve rural health
• To safeguard national security.
 Cash Flow Analysis
• Cash flow analysis is a central part of the financial and
economic evaluation of project. It is known as cash
outflow and inflow. The cash outflow refers to pays for
capital goods, services, management, and labor for the
project. The cash inflow refers to the benefit stream or
returns to the project. The annual cash flow is the net
incremental "benefits" for each year of a project and
which is the difference between the incremental
benefits and costs. Similarly total cash flow is the sum
of annual cash flows for the life of the project. The net
cash flow (the difference between cash inflow and
outflow) describes the dynamic transaction of the
project at yearly intervals. Thus, Cash flow analysis
determines the difference between the incremental
costs and the incremental benefits for each year of a
project in order to evaluate its financial viability.
 Uses

• Provides an overall picture of the incremental

costs and benefits accruing from a project
over the estimated life of the project,
• Indicates any negative cash flow years which
may affect project viability,
• Provides the basis for calculating measures
which account for the time value of money
 Advantages

• Cash flow analysis shows the changes that the

project is expected to bring about in both
incremental benefits and costs.
• The total cash flow of a project gives an
indication of the performance of a project
during its life.
• A negative cash flow may indicate financing
problem of a project, or other reasons, which
need to give special attention.
 Limitations

• The assumptions about individual project

induced changes in the environment may be
lost in the aggregate data.
• The unquantifiable effect (eg. good will, sense
of security, etc) is difficult to include in the
total cash flow.
 Procedure of calculating Cash flow

• Identify costs and benefits components of the

project
• Determine the life span or the time span of the
analysis
• Estimate gross costs and benefits of each year of
the project
• Compute the incremental cost and the benefits of
the project for each year
• Compute annual cash flows or net incremental
benefits
 Gross costs Gross benefits Net

With project C B B-C

Without project c b b-c

Incremental (marginal)  C - c = C incremental cost, B - b =B incremental B-C (Incremental benefit-

CASH OUTFLOW benefit, Incremental cost) = Net
CASH INFLOW incremental benefit
 An imaginary numerical example of cash flow analysis by taking
with and without project situation .
1 2 3 4 5 6 7 8 9 10 Total

Without
project
Gross
costs

Usualpro 100 100 100 100 100 100 100 100 100 100 1000
duction
expenses

Gross 160 160 160 160 160 160 160 160 160 160 1600
benefits
Net 60 60 60 60 60 60 60 60 60 60 600
benefits
(annual
profit)

With
project
Investment costs 500 0 0 0 0 0 0 0 0 0 500
(tractor)

Production
expenses

Usual expenses 130 130 130 130 130 130 130 130 130 130 1300

Operating and 50 50 50 50 50 50 50 50 50 50 500

maintenance of
tractor

Gross benefits 360 360 360 360 360 360 360 360 360 360 3600
Net (320) 180 180 180 180 180 180 180 180 180 1300
benefits*
(annual
profit)

Changes
due to
project

Intermediate 580 80 80 80 80 80 80 80 80 80 1300

cost (cash
outflow)

Intermediate 200 200 200 200 200 200 200 200 200 200 2000
benefits
(cash
inflow)

Net (380) 120 120 120 120 120 120 120 120 120 700
 Total cash flow = Rs. 700
• Note: NB*=GB-GC, incremental cost=gross cost
of with project- gross costs of without project,
incremental benefits=gross benefit of with
project – gross benefit of without project, net
incremental benefit= incremental benefit –
incremental cost (B-C). Figure in parenthesis
represent the negative sign.