Catalog

	Table of Contents
p. 26 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

---

X. Investment Criteria : Economic Viability

A. Project Decisions

125. The preceding sections outlined the principles for identification, quantification, and valuation of project costs and benefits. The resulting streams of costs and benefits are used to make project choices. Essentially, there are three types of project decisions for which criteria are needed:

• choice of the least-cost option for achieving the same benefits,
• choice of the best among project alternatives, and
• testing the economic viability of the best option.

126. The first type of decision occurs when benefits cannot be valued for comparison with project costs. Such situations are discussed in Chapter IX. The purpose is to achieve the same benefit effect at the lowest cost. The second type of decision occurs at the early stages in all projects, when choices are being made about project location, scale, size, and other features of project design. Costs and, to some extent, benefits may differ between mutually exclusive alternatives. The purpose is to choose the best alternative from the point of view of the national economy. The third type of decision is the basis for agreeing to fund a project or not. The best project alternative may not be economically viable. A test is needed of the economic viability of the best alternative for a project, in short, whether a proposed project is acceptable for investment or not.

127. To make these decisions, all cost and benefit streams are discounted to present value. Present costs and benefits are accorded a larger weight than those in the future. Moreover, the weights on future costs and benefits are treated as decreasing at a constant rate each year. To determine the least-cost option or to compare project alternatives, the same discount rate should be applied to the various cost and benefit streams. For this purpose, the Bank uses a discount rate between 10 and 12 percent. The same discount rate should be used to determine if a project is economically viable. In choosing the best alternative or testing economic viability, where costs and benefits are measured in economic prices, this discount rate for decision-making purposes should be regarded as the economic discount rate relevant for economic prices (see Section XI).

Back X. Investment Criteria: Economic Viability	Next B. Choosing Between Alternatives When Benefits Are Not Valued