Manual for Development Projects - Planning Commission

Chapter 5
Domestic PW of domestic currency cost of Official
Resource = realizing foreign exchange saving x Echange
Exchange
PW of net foreign exchange
saving
Cost expressed in local currency
5.16 Now the domestic resource cost calculated through the above formula is say Rs 23.65 and the official
exchange rates Rs 22 per US $. It shows that domestic resource cost is higher than the prevailing official
exchange rate and we are spending more than a dollar to produce a dollar worth of item at home than to import it.
In case the domestic resource cost is less than the official exchange rate, it implies that the project is using less
domestic resources to save or earn a unit of foreign exchange and thus the project is economically justified.
5.17 In the social sectors, we perform unit cost analysis. The only method used to any extent to deal with
intangible benefits is to determine, on a present worth basis, the least expensive alternative combination of
tangible costs that will realize essentially the same intangible benefits. This is often referred to as "least-cost
combination" or cost effectiveness. Economists have tried to quantify the intangible benefits. The benefits of
education have been valued by comparing the earnings of an educated man with those of one who is uneducated.
Health and sanitation benefits have been valued in the number of hours of lost work avoided by
decreasing the incidence of disease. Nutrition benefits have been valued in terms of increased productivity.
Population projects have been valued by attaching a value to the births. But these valuations are highly
questionable. In cost analysis, we only take the cost side - that is, the cost-stream on training, capital cost, O&M
cost, replacement cost and salvage value (negative cost) is discounted at the opportunity cost to find the annual
financial cost/subsidy and unit cost. In case of a health project, the unit cost will be cost per bed; in case of an
education project, it will be cost per student; and in case of a housing project, it will be cost per square foot. In
housing projects, the calculation of the standard rent of residential quarters is also an important job. In unit cost
analysis, those projects which have a relatively lower unit cost than that of other projects of the same kind are
favoured.
5.18 Various concepts used in project appraisal have been discussed earlier in this chapter. A set of practical
discounted measures of project worth are as follows:-
Financial Analysis Economic Analysis
(a) Discounted measures (a) Adjustment in prices
i) Present Worth of Cost (PWC), Present Worth of
Benefit cial Capital Cost into (PWB), Net Present
Value Economic Cost.
(NPV), Benefit-Cost Ratio
(BCR) at given discount rate.
i) Transformation of Finan-
ii) Internal Financial Rate ofReturn (IFRR) ii)
Transformation of Financial and Operation &
Maintenance (O&M) costs into Economic Cost.
iii) Return on Equity after taxes. iii) Benefits Valued at Border prices.
iv) Return on Equity before taxes.
(b) Sensitivity Analysis (b) Discounted Measures
i) PWC, NPV, BCR & IFRR with cost over-run,
reduction in benefits and delay in realization of
benefits.
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i) PWC, PWB, NPV & BCR at
given discount rate.
Rate
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9/23/2010