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	Table of Contents
p. 22 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 A. General Considerations B. Role of World Prices C. Economic Prices of Traded Goods and Services D. Economic Prices of Nontraded Goods and Services E. The Economic Price of Labor F. The Economic Price of Land G. Bringing Economic Prices To A Common Base H. Conversion Factors I. Economic Viability: A Procedure 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 XVII. Others

Guidelines for the Economic Analysis of Projects : VII. Valuation of Economic Costs and Benefits

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I. Economic Viability : A Procedure

110. In a project context, the methods outlined above need to be applied in a cost-effective manner. The focus must be placed on those economic prices that are important for testing the economic viability of the specific project. Economic price calculations can be carried out in more or less detail. The following iterative procedure can be used to determine what level of detail to pursue:

First Iteration

1. Choose the numeraire and unit of account for the analysis.
2. Obtain the SERF or the standard conversion factor.
3. Revalue the main outputs and inputs having a trade effect at border price equivalent values. Use a simple SERF or the standard conversion factor estimate to bring traded/nontraded items to a common basis.
4. Obtain willingness to pay or other valuations for incremental nontraded outputs.
5. Identify any nontraded inputs that are crucial to the project and for which financial prices incorporate a significant tax or, more likely, subsidy element. There is likely to be only one or none for any project. Calculate a specific conversion factor for such an item.
6. Estimate a SWRF for project labor.
7. Estimate the economic value of land using the SERF or the standard conversion factor.
8. Calculate the project net present value (NPV) and internal rate of return (IRR) using:
• border price equivalent values for the main traded outputs and inputs;
• a willingness to pay or other estimate for incremental nontraded outputs;
• a specific conversion factor for any major, subsidized nontraded input;
• a SWRF for project labor adjusted by the standard conversion factor, if necessary; and
• a SERF estimate for other trade items, or a standard conversion factor estimate for other nontraded items.
9. Test the sensitivity of the results to the SERF or the standard conversion factor value used, and the SWRFs used.
10. If the project or subproject is not marginal, and if the result is not sensitive to the national parameter estimates used, present the results of the economic viability tests.

111. If the project or subproject is marginal, or if the results are sensitive to the national parameter estimates used, proceed to the second iteration:

Second Iteration

1. Estimate specific conversion factors for other nontraded inputs, labor, and land. Sometimes these can be taken from studies of national parameters carried out at the national level.
2. Reestimate the NPV and IRR of the project or subproject.
3. Present the results of the tests of economic viability (see Appendix 17).

Back H. Conversion Factors	Next VIII. Large Projects, Linkages, and National Affordability