Catalog

	Table of Contents
p. 28 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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C. Choosing Between Alternatives When Benefits Are Valued

131. Where the benefits of a project and project alternatives can be valued, they can be aggregated and compared with the costs of the project or project alternatives. Three criteria are commonly used to aggregate and compare costs and benefits. However, they cannot all be used in the same way to choose from project alternatives.

132. The benefit-cost ratio compares the present value of the cost streams with the present value of the benefit streams, each discounted at the same rate. The comparison is made by forming the ratio of the present value of benefits to the present value of costs. However, the benefit-cost ratio should not be used for choosing from alternatives as the ratio is sensitive to the way in which benefits and costs are grouped, for example, whether residual values are subtracted from the cost streams or added to the benefit streams.

133. The net present value (NPV) also compares the present value of the cost streams with the present value of the benefit streams. However, it does so not as a ratio but by taking the cost stream away from the benefit stream to obtain the net benefit stream, which can then be discounted. In choosing between project alternatives, the alternatives can be ranked according to their NPVs, which at economic prices represent the present value of net output that will be generated in the economy over the life of the project. The economic net present value (ENPV) is calculated for each project alternative using the Bank discount rate of 10 to 12 percent.

134. The third criterion for summarizing the benefit and cost effects of a project alternative is the internal rate of return (IRR). The IRR represents the rate of return in economic prices that would be achieved on all expenditures of the project. The EIRR is calculated using the net benefit stream obtained by subtracting year by year all costs from all benefits. The EIRR is the rate of discount for which the present value of the net benefit stream becomes zero. Put another way, it is the rate of discount at which the present value of the cost stream is equal to the present value of the benefit stream.

135. The ranking of project alternatives according to these three criteria may differ. The overriding purpose of the economic analysis of projects is to increase the net output measured at economic prices in the national economy. The ENPV criterion measures this directly. The choice between project alternatives should be made using the ENPV criterion at the chosen rate of discount, between 10 and 12 percent.

Criterion: Choose project alternative with the highest ENPV at the chosen discount rate (between 10 and 12 percent)

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