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In project
analysis, the accounting period is generally a year, but it could be any other convenient time
period.
Accounting prices - Equilibrium prices that are generally different from actual market prices
and from regulated tariffs. They should be used in project appraisal to reflect better the real
costs of inputs to society, and the real benefits of the outputs, than actual prices do. They
are used in the economic analysis to better reflect the real costs of inputs to society, and the
real benefits of the outputs. Often used as a synonym of shadow prices.
Appraisal - The ex-ante analysis of a proposed investment project to determine its merit and
acceptability in accordance with established decision-making criteria.
Base case - A statement of what would have happened in the absence of the project or
programme.
Benefit-cost ratio - The net present value of project benefits divided by the net present
value of project costs. A project is accepted if the benefit-cost ratio is equal to or greater
than one. It is used to accept independent projects, but it may give incorrect rankings and
often cannot be used for choosing among mutually exclusive alternatives.
Beta - A measure of market risk of a stock or a portfolio of stocks. Stocks are assessed as
low risk or high risk by reference to the beta of the market portfolio, which is one.
Business as usual scenario - A reference scenario which assumes that future evolution is an
extension of the current trends. See also do nothing scenario.
Cost of capital - Calculated as a weighted average of the interest costs of debt and equity
capital. Equity funds include both capital stock (common and preferred stock) and retained
earnings. Costs of capital are usually expressed as annual percentage rates.
Constant prices - Prices related to a base year in order to exclude inflation from economic
data. Prices that have been deflated by an appropriate price index based on prices prevailing
in a given base year.
Consumers surplus - The value consumers receive over and above what they actually have
to pay.
Consumption tax - Taxes levied on the consumption of goods and services. Indirect taxes on
consumption include excise duties, wholesale or retail sales taxes, value-added taxes, or
other taxes on intermediate transactions. Consumption taxes form a wedge between the
price paid by the purchaser and the price received by the supplier. For any good or service,
the demand price is the market price plus consumption taxes and less consumption
subsidies.
Dividend - Distribution of earnings paid to stockholders based on the number of shares they
own. The most typical type is cash, but dividends may also be issued in such forms as stock
and property.
Do-minimum The project option that includes all the necessary realistic level of
maintenance costs and a minimum amount of investment costs or necessary improvements,
in order to avoid or delay serious deterioration or to comply with safety standards.
Do nothing - The baseline scenario, business as usual, against which the additional benefits
and costs of the with project scenario can be measured (often a synonym for the without
project scenario).
Do-something - The scenario(s) in which investment projects are considered, different from
do nothing and do- minimum, see above.
Economic analysis - Analysis that is undertaken using economic values, reflecting the values
that society would be willing to pay for a good or service. In general, economic analysis
values all items at their value in use or their opportunity cost to society (often a border price
for tradable items). It has the same meaning as social cost-benefit analysis.
Economic impact analysis - The analysis of the total effects on the level of economic activity
(output, income, employment) associated with the intervention. This kind of analysis focuses
on macroeconomic indicators and forecasts the influence of the project on these indicators.
It goes beyond CBA when very large projects are considered in relatively small economies.
Economic rate of return (ERR) - The socio- economic profitability of a project. It may be
different from financial rate of return (FRR), because of price distortion. ERR implies the use
of accounting prices and the calculation of the discount rate that makes project benefits
equal to present costs, i.e. makes economic net present value (ENPV) equal to zero.
Elasticity - The ratio of the percentage by which one variable changes, given a 1 per cent
change in another. A measure of the percentage change in one variable in respect of a
percentage change in another variable. Thus the price elasticity of demand is the percentage
change in quantity that is demanded expected in respect of a percentage change in the price
of the same good.
Environmental impact analysis - The statement of the environmental impact of a project
that identifies its physical or biological effects on the environment in a broad sense. This
would include the forecasting of potential pollution emissions, loss of visual amenity, and so
on.
Externality - An externality is said to exist when the production or consumption of a good in
one market affects the welfare of a third party without any payment or compensation being
made. In project analysis, an externality is an effect of a project not reflected in its financial
accounts and consequently not included in the valuation. Externalities may be positive or
negative.
Ex-ante evaluation - The evaluation carried out in order to take the investment decision. It
serves to select the best option from the socio economic and financial point of view. It
provides the necessary base for the monitoring and subsequent evaluations ensuring that,
wherever possible, the objectives are quantified.
Ex-post evaluation - An evaluation carried out a certain length of time after the conclusion
of the initiative. It consists of describing the impact achieved by the initiative compared to
the overall objectives and project purpose (ex-ante).
Financial analysis - The analysis carried out from the point of view of the project operator. It
allows one to 1) verify and guarantee cash balance (verify the financial sustainability), 2)
calculate the indices of financial return on the investment project based on the net timediscounted cash flows, related exclusively to the economic entity that activates the project
(firm, managing agency).
Financial rate of return (FRR) - The financial profitability of a project, see internal rate of
return. Not to be confused with financial ratios such as return on sales (ROS) or return on
investment (ROI).
Gross domestic product (GDP) - The total product or value added within the physical
borders of the country. It includes production based on foreign- owned resources, even
though part of the income earned by these factors of production is transferred abroad as
factor service income payments.
Income multiplier - Ratio between national income variation and the expenditure variation
that caused it.
Inflation - A sustained rise in the general price level; the proportionate rate of increase in
the general price level per unit of time.
Intangibles - Costs or benefits that resist quantification.
Internal rate of return - The discount rate at which a stream of costs and benefits has a net
present value of zero. Financial rate of return (FRR), when values are estimated at actual
prices. Economic rate of return, (ERR) when values are estimated at accounting prices. The
internal rate of return is compared with a benchmark in order to evaluate the performance
of the proposed project.
Marginal cost - The extra cost of producing an extra unit of output.
Market price - The price at which a good or service is actually exchanged for another good or
service or for money, in which case it is the price relevant for financial analysis.
Merit good - An additional criterion of project appraisal applied when the government has a
preference for more or less consumption of particular goods, such as education and alcohol
respectively.
Public Private Partnership - A partnership between the public sector and the private sector
for the purpose of delivering a project or a service traditionally provided by the public
sector.
Public good - A good which, because it cannot be withheld from one individual without
being withheld from all, must be supplied publicly. National defence, street lighting, and
general police protection are examples. Non-rival goods are also considered public goods
because supplying them to one person does not reduce the supply to another person.
Private goods - Goods characterized by very high levels of subtractability and excludability.
Subtractability means that one persons consumption of the good reduces the quantity
available to others. Excludability means that the producer can restrict use of the product to
those consumers who are willing to pay for it, while excluding those who do not meet this or
other criteria. Private goods can be produced under private ownership or under public
ownership. Except under special circumstances, for example, production in conditions of
natural monopoly and where the government lacks the capacity to regulate, production of
private goods increasingly is undertaken under private ownership.
Real convergence - Reduction of disparities of per capita income and economic welfare
among regions.
Real rates - Rates deflated to exclude the change in the general or consumption price level.
Regression analysis - A set of statistical techniques, whose purpose is to quantify the
relationship between two or more variables. Widely used in the quantitative forecasting of
demand.
Residual value - The net present value of assets at the final year of the period selected for
evaluation analysis.
Risk analysis - A study of the odds of the project's earning a satisfactory rate of return and
the most likely degree of variability from the best estimate of the rate of return. Although
risk analysis provides a better basis than sensitivity analysis for judging the riskiness of an
individual project or the relative riskiness of alternative projects, it does nothing to diminish
the risks themselves. It helps, however to identify risk prevention and management
measures.
Sensitivity analysis - A study of the impact that pre-assigned changes in variables affecting
costs and/or benefits would have on the ERR or FRR.
Shadow prices - See accounting prices. A price which is imputed as the true marginal value
of a good or opportunity cost of a resource and which may differ from the market price.
Social discount rate - Social discount rate is to be contrasted to financial discount rate. It
attempts to reflect the social view on how the future should be valued against the present.
Without project scenario - The baseline scenario against which the additional benefits and
costs of the with project scenario can be measured (e.g. business as usual). In project
analysis, the relevant comparison is the net benefit with the project compared with the net
benefit without the project, in order to measure the additional benefits that can be
attributed to the project.