Catalog

	Table of Contents
p. 29 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 A. Project Decisions B. Choosing Between Alternatives When Benefits Are Not Valued C. Choosing Between Alternatives When Benefits Are Valued D. Testing The Economic Viability of The Best Alternative E. The Chosen Discount Rate F. Project Investments and The Budget 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 XVII. Others

Guidelines for the Economic Analysis of Projects : X. Investment Criteria: Economic Viability

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D. Testing the Economic Viability of the Best Alternative

136. The best project alternative may not be economically viable. A test of viability needs to be applied to the chosen alternative, and to any subprojects within it. The basic test for economic viability is whether or not there are other projects in the national economy that, when estimated in the same way, would yield a greater increase in net output. In practice, not all investment opportunities are collected together and compared. The way this comparison is done is to specify a rate of discount representing the next best alternative project in the economy, and to ensure that the project being analyzed creates net benefits in present value at a rate that exceeds those of the next best alternative. This can be done using any of the three criteria discussed above.

137. The chosen rate of discount for decision making is between 10 and 12 percent. At a discount rate within this range, the two main criteria can be used as follows:

• Net Present Value: the discounted value of economic net benefits should be positive.
  Criterion: Accept all independent projects and subprojects for which the ENPV is greater than 0.
• Economic Internal Rate of Return: The economic internal rate of return on resources should exceed that on the next best alternative project.
  Criterion: Accept all independent projects and subprojects for which the EIRR is greater than the chosen discount rate.

138. These two criteria are equivalent. They will lead to the same acceptance and rejection of independent projects and subprojects.

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