Catalog

	Table of Contents
p. 47 of 74 BACK | NEXT I. Introduction II. Background III. The Economic Rationale of A Project IV. Macroeconomic and Sectoral Context V. An Integrated Approach To Economic Analysis VI. Identification and Quantification of Costs and Benefits VII. Valuation of Economic Costs and Benefits VIII. Large Projects, Linkages, and National Affordability IX. Least-Cost and Cost-Effective Analysis X. Investment Criteria: Economic Viability XI. Discount Rate XII. Uncertainty: Sensitivity and Risk Analysis XIII. Sustainability of Project Effects XIV. Distribution of Project Effects XV. Projects and Policies XVI. Appendices Appendix 1: Key Questions For The Economic Analysis of Projects Appendix 2: Project Economic Rationale: Market and Nonmarket Failures Appendix 3: The Project Framework Appendix 4: Identification and Measurement of Consumer Surplus Appendix 5: Treatment of Working Capital Appendix 6: Depletion Premium Appendix 7: The Use of Constant Prices In The Economic Analysis of Projects Appendix 8: General Methodology For Building Up Project Statements Appendix 9: Economic Evaluation of Project Output and Input Appendix 10: Economic Price of Traded Goods and Services Appendix 11: Valuation of Nontraded Outputs and Inputs Appendix 12: Shadow Wage Rate and The Shadow Water Rate Factor Appendix 13: The Economic Price of Land Appendix 14: Treatment of Resettlement Components of Projects Appendix 15: Calculating Economic Prices At The Domestic Market Price Or World Market Price Levels Appendix 16: Estimating The Shadow Exchange Rate Factor and The Standard (Or Average) Conversion Factor Appendix 17: Example of An Economic Rate of Return: An Irrigation Rehabilitation Project Appendix 18: Effect On Net Foreign Exchange and Budget Flows: An Example Appendix 19: Least-Cost Analysis and Choosing Between Alternatives Appendix 20: Estimating The Economic Opportunity Cost of Capital Appendix 21: The Treatment of Uncertainty In The Economic Analysis of Projects: Sensitivity and Risk Analysis Appendix 22: User Charges, Cost Recovery, and Demand Management: An Example For Piped Water Appendix 23: Financial Returns To Project Participants: An Illustration Appendix 24: Economic Evaluation of Environmental Impacts Appendix 25: Distribution of Project Effects Appendix 26: Impact On Poverty Reduction Appendix 27: Difference Between Economic and Financial Prices Appendix 28: Use of Economic Prices In Measuring Effective Protection Appendix 29: Exchange Rate Issues In Project Analysis XVII. Others

Guidelines for the Economic Analysis of Projects : XVI. Appendices

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Appendix 5 : Treatment of Working Capital

1. Stocks of materials and spares need to be available to facilitate the smooth functioning of a project's operations. Stocks of final goods may be held before their sale and distribution. Other materials and inputs will be tied up in partially completed production outputs. For some projects, particularly in agroprocessing or industry, such working capital stocks need to be allowed for in the estimates of initial project investments and included in the project statement at financial and economic prices. They are separate from the annual project costs on operations and maintenance.

2. Several types of projects involve negligible working capital. For example, irrigation and road projects require considerable resources for regular operation and maintenance, including labor. However, they require very small amounts of resources tied up and available as materials and spares. Other projects may require stocks of materials but not outputs, for example, power generation from coal that requires coal stocks at power plants but where the product is not storable.

3. In the economic analysis of projects, the value of working capital is calculated at constant prices. If the level of stocks varies over the year, as for many agriculture-based activities, annual average stock levels are used in the calculations. The project statement for economic analysis should contain a cost row showing annual increases in working capital in early project years. The total stocks held as working capital are released at the end of the project and should be shown as a residual value.

4. For agroprocessing and manufacturing investments, and some other projects, working capital may be an important cost for project assessment and financing. Here a full treatment of working capital is required (see paras. 5, 6, 7, and 8 for an example).

5. The components of working capital are

• initial stocks of materials equivalent to two months requirement for the following year's production level, valued at shadow prices;
• final stocks of outputs equivalent to one months sales in the current year, valued at cost in shadow prices; and
• work in progress based on a production period of 20 days and a working year of 250 days, at the current year's production level, valued in shadow prices.

6. Basic data has been prepared on annual operating costs at 100 percent capacity utilization (Table 1).

^a Domestic price numeraire (See Appendix 15)

7. Capacity utilization in this sample processing project builds up over three years at utilization rates of 50, 80, and 100 percent, and then is sustained at maximum capacity. The fixed operating costs include administrative labor and nontradable items for office supplies. The variable operating costs include traded materials with an 11 percent import duty, and negligible handling and transport costs; utility services, which are largely sold at full cost price; and operating labor with an opportunity cost of 75 percent of the annual wage level. A shadow exchange rate factor of 1.4 is applied to the nontax element of traded costs.

8. Table 2 illustrates the calculation of each component of working capital within a project with a one-year construction period and a ten-year operation period, on the basis of the assumptions above. The annual change in working capital is summarized in the bottom row. It is this annual change in working capital and the corresponding residual value that is entered into the project statement for economic analysis of projects.

^a Two months' worth of materials: 252 x 2/12 = 42.

^b One months worth of sales at cost: 522 x 2/12 = 44.

^a Value of materials for the production period, plus half the additional value of other variable costs added during processing for the production period: [252 + 0.5 (522-252-150] x 20/250 = 25.

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