Unit one

• Concept of project
Concept of project
• Project planning and analysis has a long history in financial and business
analysis.

• It has always been used as a means of checking the profitability of a particular

investment by private firms.

• Project planning and analysis is essentially a process of “seeking alternative

choices” to reach an agreed upon set of objectives in the most efficient manner.
• Projects are now assessed from the economy‟s viewpoint instead of only from
the firm‟s perspective.
• The selection criteria have also included economic criteria on top of financial
criteria.
Project Concept

Project (investment time)

Present
Future
situation
situation
Definition of Project

• Project define as an investment activity in which financial

resources are expended to create capital assets that
produce benefits over an extended period of time.
• It is a complex set of activities where resources are used in
expectation of return and which lends itself to planning,
financing and implementing as a unit.
Project management

• Project management is defined as managing and directing time,

material, personnel/ labour, and cost to complete a project in
orderly, economical manner and to meet the established
objectives of time, cost and technical and/ or service results.

• A successful project using the project management approach

will consist of three stages:
• Planning: understanding what work has to be done including
Identifying the individual activities and necessary resources to
complete the project.
Developing a plan of action in a logical order.
• Scheduling: Validating when the work activities need to be
done.
This stage details the time allowed for the project and each activity
when they are to be started and completed.
• Controlling: Monitoring (tracking) progress of the project as it
gets underway, analyzing performance, and then resolving
concerns. It also manages status report.
Advantage of using good project management

Better control of financial, physical, and human resources

Improved customer relations
Shorter development times
Lower costs
Higher quality and increased reliability
Higher profit margins
Improved productivity
Better internal coordination
Higher worker morale
Characteristics of project
• A project has a unique purpose. Every project should have a well-defined
objectives (goals) to achieve.
• Temporary. A project has a definite beginning and a definite end.
• It is developed using progressive elaboration or in an iterative fashion. Projects
are often defined broadly when they begin, and as time passes, the
specific details of the project become more clear.
• It requires resources
• It should have a primary customer or sponsor. Most projects have many
interested parties or stakeholders, but someone must take the primary
role of sponsorship.
• It Involves risk and uncertainty. Because every project is unique, it is
sometimes difficult to define the project‟s objectives clearly, estimate
exactly how long it will take to complete, or determine how much it
will cost.
The linkage between projects and programs

• A project is an investment activity where resources are used to create capital assets, which
produce benefits over time and has a beginning and an end with specific objectives.
• A program is an ongoing development effort or plan which may not necessarily be time
bounded.
• a program is a wider concept than a project
• E.g. Road development program, health improvement program, nutritional improvement
program, rural electrification program, etc
• A project is designed with a high degree of precision and details as regards its objectives, features,
calculation of returns and implementation plan.
• A program by contrast is general, lacks details and precision and aims at a broader goal
often related to a sectoral policy of a country or departmental policy of an organization.
• Projects in general need to be SMART.
• S – Specific
A specific in its objective.
A specific activities.
A specific group of benefits.
A specific group of people.
• M - Measurable
• Projects are designed in such a way that investment and
production activities and benefits expected should be identified
and if possible be valued (expressed in monetary terms) in financial,
economic and if possible social terms.
 A – Area bounded
• As projects have specific and identifiable group of beneficiaries, so also
have to have boundaries.
• In designing a project, its area of operation must clearly be identified
and delineated.
R – Real
• Planning of a project and its analysis must be made based on real
information. Planner must make sure whether the project fits with real
social, economic, political, technical, etc situations. This requires detail
analysis of different aspects of a project.
T – Time bounded
• A project has a clear starting and ending point.
• The overall life of the project must be determined.
• Investment and production activities have their own time sequence.
• Every cost and benefit streams must be identified, quantified and valued
and be presented year-by-year.
Importance of Project Planning

• It boosts project performance and success rates; to avoid almost all

of the problems that lead to project failure.
• It saves money; it helping to eliminate wasteful activities and
patterns.
• It improves team communication ; how project leads and team
members will manage communications becomes vital.
• It ensures the best use of resources
• It improves employee retention; it not only benefits the
project‟s performance and outcome but also plays a role in
employee retention
• etc..
Project Analysis

• Project planning and analysis is essentially a process of

“seeking alternative choices” to reach an agreed upon set of
objectives in the most efficient manner.
• Project analysis is a method of presenting this choice
between competing uses of resources in a convenient and
comprehensible fashion.
• In essence, project analysis assesses the benefits and costs of a
project and reduces them to a common denominator.
Why agricultural projects fail ?
• A lack of local ownership and responsibility
• Problems of project design and implementation.
• The use of inappropriate technology, cropping systems and
animal husbandry.
• Inadequate or inappropriate infrastructure.
• Failure to appreciate the social and political environment.
• Administrative problems.
• Changing economic situations and market conditions.
• Problems related to poor project analysis.
• Unrealistic expectations.
• Unsupportive policy environment
Project Formats
• Project Formats; provides an analytical
framework for a proposed investment in which the
cost and benefit accounts are prepared year by year
in the form of a project cost and benefit stream.
Advantages of the project format
• It establishes the framework for analyzing information from a
wide range of sources
• It gives an idea of costs year after year; easily determined costs and
benefits of the project.
• Estimate effects on participants; such as farmers, small
firms, government enterprises, or the society.
to identify ‘gainers’ and ‘losers‟ in the project area.
• To encountered administrative and organizational problems
• Better criteria for monitoring the progress of implementation
• It examine different alternatives
• To help contain the data problem; . Information gathered in
the process of project preparation and analysis could to alleviate
the data problem
Limitations of the project format
• It depends on the quality of the data used for of the forecast
of costs and benefits
E.g., Market shares, future prices, yield potentials, relevance
of inflation,
• It provides limited support in judging the risk and
uncertainty surrounding the project
• Partial analysis; project analysis treats each project
independent of the whole economy and usually lacks
consistency and overall feasibility
• etc…..
 Unit two

• Aspects of Project Preparation and Analysis

 Technical Aspects
• It is concerned with the projects inputs (supplies) and outputs of real goods and services
and the technology of production and processing.

• In general agricultural project; examine

• soils in the region of the project and their potential for agricultural development
• availability of water, both natural (rainfall, and its distribution) and supplied (the
possibilities for developing irrigation, with its associated drainage works)
• crop varieties and livestock species suited to the area
• production supplies and their availability;
• potential and desirability of mechanization
• pests endemic in the area and the kinds of control that will be needed.
• Marketing and storage facilities
Con.t…
• In general the technical analysis is primarily concerned with
• Material inputs and utilities
• Manufacturing process and technology
• Product mix
• Plant capacity
• Location and site
• Machines and equipment
• Structure and civil works
• Project charts and layouts
• Work schedule
 Commercial /Demand and Market/ Aspects
• Commercial aspects involves arrangement for marketing demand for outputs produced by the
project and the arrangements for the supply of inputs and services needed to build and operate
the project.

• On the input side (demand)

• Fertilizer,
• Pesticides,
• Highly yielding seed the need to adopt new technology
• Financing etc.
• On the output side
• Quality of the product
• Market demand for the product
• Effects on prices
• Processing and value added effects
• Effects on the domestic and/or export market and etc.
 Institutional-organizational-managerial aspects
• Project analysis must make a detail analysis of project organization and
management
• Is the organizational set-up of the project adequate?-
about the proposed organization chart of the implementing agency
• Will the project be provided with competent personnel to manage it?-
Aims at ensuring that adequate project staff can be recruited locally or overseas.
• Some important aspects include land tenure, indigenous farmer organizations,
authority, and responsibility.
• The organizational structure, inter-organizational linkages and efficient
management of the organizations are crucial for success
 Financial Aspects

• Financial analyses is measures the financial viability of the project.

• Financial aspects include the financial effect of the project on participants,
• farmers‟
• firms
• public corporations
• project agencies, and
• the national treasury.
• The financial analysis establishes the magnitude of costs of investment, production and
overheads and magnitude of benefits.
• Project profitability depends on a comparison of costs versus revenues using realistic
market prices of materials, labor and outputs.
 Con.t…
• The aspects, which have to be looked into while conducting financial appraisal, are:
Investment outlay and costs of the project
Means of financing; source of finance, credit terms, interest rates, etc
Cost of capital
Projected profitability
Break-even point
Cash flows of the project
Investment worthiness judged in terms of various criteria of merit
Projected financial position
Level of financial risk
• Financial analysis must generate future financial statements such as income
statement, balance sheet and uses-and-source-of-fund statement.
 Economic Aspects
• The economic analysis gives a quantitative estimate of the projects impact on
national economy.
• Economic aspects determine the value of the project from the view point of society
at large and also to determine the economic efficiency with which scarce resources
are allocated.
• The financial analysis views the project form the participants (or owners) point of
view, while
• The economic analysis form the society‟s point of view.
 Financial vs Economic Aspects of the project
• Economic analysis taxes and subsidies are treated as transfer payments.
• While financial analysis such adjustment are normally unnecessary taxes are usually treated
as a cost and subsidies as a return.

• Financial analysis uses projected market prices to value inputs and outputs,
• While Economic analysis require adjustment of market prices (uses „economic prices‟ or
„shadow prices‟ or „efficiency prices‟)

• the interest on capital is never separated and deducted from the gross return because it
is part of the total return to the capital available-to the society as a whole and because it is
that total return including interest, that economic analysis is designed to estimate.
• While financial analysis, interest paid to the external suppliers of money may be deducted
to derive the benefit stream available to the owners of capital.
 Social Aspects
• The social patterns, custom, culture, traditions and habits of the clientele a
project will serve are assessed.
• Project benefiting lower income group will be favored.
• Explicit attention be paid to income distribution.

• Other aspects include

• employment opportunities
• regional dimensions
• losers and gainers in terms of social groups
• gender issues
• impact on social organizations
• change in tenurial division of labor
• quality of life improvement, i.e. water, health, education, etc
 Environmental aspect
• In recent years environmental concerns have assumed a great deal of significance.
• Environmental impact of a project refers to the effect of a project on the world of
animals, plants, water, air, and humans existing in the project area.
• Ecological analysis should be done particularly for major projects, which have
significant ecological implications like power plants and irrigation schemes, and
environmental polluting industries
• There are basically two ways of measuring environmental externalities
• Direct method - using market price
• Indirect methods
 Con.t.
• Indirect methods:
• Contingent valuation - willingness to pay or willingness to accept (WTA) to give up a
good
• Contingent valuation has been successfully used for commodities that are not exchanged
in regular markets
• E.g., improvements in water or air quality
• Travel cost method - valuing parks and historical areas to visit
• Avoidance expenditure are actual or imputed costs for preventing environmental
deterioration by alternative production and consumption processes, or by the reduction of
or abstention from economic activities.
• how much people expend to avoid negative externalities
• Hedonic wage/property value
• E.g., Assume two houses A & B with the same quality but in different location.
• House A (in polluted area) - costs 400 birr rent & House B (in clean area) - costs 500 birr
rent - then 100 birr difference is the cost of pollution.
 Summary
• Technical analysis
• Technical viability
• Sensible (workable) choices
• Commercial /Demand and Market/ analysis
• Potential market
• Market share
• Institutional-organizational-managerial analysis \
• Staff levels
• Determine the organizational structure and management system
• Financial analysis
• Risk
• Return
• Economic analysis
• Benefits and cost in shadow price
• Other impacts
• Environmental analysis
• Restoration measures
• Environmental damage
 Unit 3

• Project Cycle
 Project Cycle
• It refers to the various stages through which project planning proceeds from the
inception to implementation.
• It is the life cycle through which a project advances from infancy to maturity.
• It is a sequence of events, which a project follows.
• The main features of project cycle are
• Information gathering,
• Analysis, and
• Decision-making.
• The two approaches of project cycle; namely,
World Bank
United Nations Industrial Development Organizations Approaches (UNIDO).
 Project Life Cycle – World Bank Approach
• According to World Bank, project cycle involves five stages; namely,

• Project identification,
• Preparation (pre-feasibility and feasibility),
• Appraisal (Selection and project design),
• Implementation, and
• Evaluation.
 1. Project identification
• The first stage in the project cycle is to find potential projects.
• Identification of promising investment opportunities requires imagination, sensitivity to
environmental changes, and a realistic assessment of what the firm can do.
• This phase may take two forms.
Private venture in the context the initiating entity will define the concept,
expectation and objectives of the project.
 Government agencies in the context of government development plans.
• All types of specialists‟ input are required at this stage.
• This stage is also called pre-feasibility studies.
 Con.t….
• In general there are four major sources from which ideas or suggestions for project may come
o Project ideas from technical specialists
o Project ideas from local leaders
o Project ideas from entrepreneurs
o Project ideas from government policy and plans
• In addition, project ideas might emanate from
New experiments from previous project failures
New experiments from expansion
Replication of successful project tested elsewhere
New experiments from shortage or excess of resources
External threat; Opportunities
Internal strengths and/ or weakness and Other sources
 Con.t…
• Sometimes at identification stage there could be a number of alternatives that could be
examined.
• Some of these projects may appear for reasons nothing to do with the national plan.
• In such circumstances it is advantageous to understand the „political history‟ of the project.

• The identification of project ideas is based on several aspects of development.

• Need - a need assessment survey may show the need for intervention.
• Market demand - domestic or overseas
• Resource availability - opportunity to make available resources more profitable.
• Technology - to make use of available technology.
• Natural calamity - intervention against natural calamity such as flood or drought
• Political considerations
 2. Project Preparation
• Once project ideas have been identified the process of project preparation and analysis
starts.
• Project preparation must cover the full range of technical, institutional, economic, and
financial conditions necessary to achieve the project‟s objective.
• Critical element of project preparation is identifying and comparing technical and
institutional alternatives for achieving the project‟s objectives.
• It involves generally two steps
 Pre-feasibility studies
• Some of the main components examined during the pre-feasibility study include:
Availability of adequate market
Project growth potential
Investment costs, operational cost and distribution costs
Demand and supply factors; and
Social and environmental considerations
 Con.t..
 Feasibility Study
• The major difference between the pre-feasibility and feasibility studies is the amount of
work required in order to determine whether a project is likely to be viable or not.
• If the preliminary screening suggests that the project is prima facie worthwhile, a
detailed an analysis of the marketing, technical, financial, economic, and ecological
aspects will is undertaken.
• The focus of this phase of capital budgeting is on gathering, preparing, and
summarizing relevant information about various project proposals, which are being
considered for inclusion in the capital investment.
• Based on the information developed in this analysis, the stream of costs and benefits
associated with the project can be defined.
 Con.t….
• At this stage a team of specialists (Scientists, engineers, economists, sociologists) will
need to work together.
• At this stage more accurate data need to be obtained and if the project is viable it
should proceed to the project design stage.
• The final product of this stage is a feasibility report. The feasibility report should contain
the following elements:
 Market analysis
 Technical analysis
 Organizational analysis
 Financial analysis
 Economic analysis
 Social analysis, and
 Environmental analysis
 3. Project Appraisal
• Appraisal is the comprehensive and systematic assessment of all aspects of the
proposed project. Such as technical, commercial (market), financial, economic and
ecological.
• It addresses the question -is the project worthwhile?
• Wide ranges of appraisal criteria have been developed to judge the worthwhile of a
project.
• They are divided into two broad categories, viz., non-discounting criteria and
discounting criteria.
• To apply the various appraisal criteria suitable cut off values (hurdle rate, target rate,
and cost of capital) have to be specified.
 4. Project Implementation
• Implementation is a process of refinement, of learning from experience-in
effect, it is a kind of "mini-cycle“ within the larger project cycle we have
outlined.
• Some aspects of implementation that are of particular relevance to project
planning and analysis.
• 1st The better and more realistic a project plan is, the more likely it is that the
plan can be carried out and the expected benefit realized.
• 2nd Project implementation must be flexible- if Circumstances will change, and
project managers must be able to respond intelligently to these changes.
 Con.t….
• Project analysts generally divide the implementation phase into three time periods.
• Investment phase, where the major investments are made. This may extend from three to
five years.
• Development phase, which may also extend (additional ) from three to five years.
• Project life -exceeds twenty-five to thirty years.
• Some of the major activities in project implementation phase include:
 Detailed designs and specifications are drawn
 Tender documents are prepared
 Bid are invited and evaluated
 Orders for imputes are placed
 Contract are signed;
 workers are hired, trained and put to work.
 Materials are moved to sites etc.
 5. Ex-post evaluation (Project monitoring and evaluation)
• Monitoring is a continuous process that aims primarily to provide project management
and give the main stakeholders early indications of progress or lack of progress towards
achieving project objectives.

• In this stage it is important to examine the project plan and what really
happened.
• Evaluation is not limited only to completed projects.
• Ongoing projects could also be evaluated to rectify problems when the project is in
trouble.
• The project management, the sponsoring agency, or other bodies may do the
evaluation.
 Con.t…
• Project evaluation is a monitoring (checking) activity in order to:
 Find out how things are going
 Encourage the project team
 Check that promised resources are in fact working on project tasks
 Rapidly learn about concerns and difficulties
 Show concern for the success of the project; and
 Performance review should be done periodically to compare actual performance with
projected performance.
 Take corrective action if things go wrong.
 Project Life Cycle – UNIDO Approach

• According to UNIDO , project cycle involves three major phases.

• Pre-investment phase,
• Investment phase (implementation phase), and
• Operation phase (operation and ex-post evaluation)
 Pre-investment phase
• The pre-investment phase includes four major activities; namely
• Project identification/ opportunity study;
• It is the main instrument used to quantify the parameters, information and
data required to develop a project idea in to a proposal
• Pre-selection/ Pre-feasibility study this phase involves the analysis of the following
factors:
• Examination (investigation) of all possible project alternatives , ensure that the
detailed analysis of the project is justified , In-depth investigation of critical areas of
the project; and examine the stability of the environmental situation at the location
site.
• Project preparation/ (feasibility study): this stage provides all data, define, and
critically examine the commercial, technical, financial, economic and environmental
aspects for each project.
• Project appraisal is based on the objectives set earlier, the expected risk, cost, and gain.
 Investment Phase
• The investment phase, also called implementation phase, includes the following
activities:
• Establishing legal
• Financial and organizational basis
• Technology acquisition and transfer
• Detailed engineering, design, contracting, tending and negotiations
• Acquisition of land, construction words, and installations
• Pre-production marketing, securing of supplies, and setting up administration;
• Recruitment, training, and placement of workers and
• Plant commissioning and start up.
 Operating phase
• Once activities listed under investment phase are completed, the project will go into
actual operation.
• The operation involves producing the envisaged goods, and sale to the target market,
or renders the envisaged service to the target market.
• The project also requires evaluation, which deals with the review of whether the
project is being implemented as per expectation.
• The necessary corrective actions should also be taken if deviation is identified
 The Logical Framework Approach (LFA)

• Logical Framework Approach is a systematic planning procedure for complete

project cycle management.
• It is a problem solving approach which takes into account the views of all stakeholders.
• It also agrees on the criteria for project success and lists the major assumptions.
 Features of Logical Framework Approach (LFA)

• Stakeholder involvement
• needs-based approach
• logical intervention approach
• framework for assessing relevance
• feasibility and sustainability,
• results-oriented – not activity driven
• logically sets objectives and their causal relationships
• shows whether objectives have been achieved: Indicators (for M&E), describes
external factors that influence the project‟s success:
• assumptions and risks
 Main steps in LFA
• Stakeholder Analysis
• It is any individuals, group or organization, community, with an interest in the outcome of a
program/project.
• Purpose in Stackholder analysis: to identify:
• The needs and interest of stakeholders
• The organizations, groups that should be encouraged to participate in different stages of the project;
• Potential risks that could put at risk program;
• Opportunities in implementing a program;
• To assess the performance and capacity of the participating units, divisions of organization.
• Each participating unit has to undertake SWOT analysis.
 Stakeholder Analysis Matrix

Importance to Influence on
Stakeholders Key Interests Participation
Project project

Primary

Secondary
 SWOT Analysis
• SWOT Analysisis a tool for institutional appraisal and a brainstorming exercise in
which the representatives of the organization participate fully.
• Problem Tree Analysis
• Objective Tree Analysis
• Logical Framework Matrix and
• Monitoring and Evaluation.
 Unit 4

• Agricultural Project Costs and benefits

 Identifying Costs and benefits in agricultural project
• The costs and benefits of a project therefore must be identified.
• Further more, once costs and benefits are known they must be priced and their economic
value determined.
• Objectives, Costs and Benefits
• In project analysis, the objectives of the project provide the standard against which cost and
benefits are defined.
• Cost is anything that reduces an objective, and
• Benefit is anything that contributes to an objective.
 Con.t..
• The problem with such simplicity, however, is that each participant in the project has
many objectives. For example;
• For a farmer
Increase household income/ Net incremental benefit
Educating children
Reducing work hours (consuming more leisure)
Paying debt
Reducing risk
Meet social obligations
•.
Con.t..
• For private business firm
o Maximizing net income (profit)
o Increasing market share
o Improving customer satisfaction
o Reducing risk, etc
Con.t..
• A society or a nation as a whole may want to achieve the following objectives
as:

 Increasing national income (growth objective)

 Ensuring equitable distribution between persons, regions, generations, etc. (distributional
objective)
 Improving balance of payments
 Improving regional integrity
 Reducing inflation
 Reducing unemployment
 Maintaining environment, etc.
 Costs & benefits: in financial and economic analysis
• The projected financial revenues and cost are often a good starting point for identifying
economic benefits and costs but two types of adjustments are necessary.

• It is necessary to include (or exclude) some costs and benefits.

• It is necessary to revalue inputs and outputs at their opportunity cost.

• Financial analysis which looks the project from the perspective of the implementing agency,
identifies the project’s net money flows to the implementing entity and assesses the entities
ability to meet its financial obligations and to finance future investments.

• Economic analysis, by contrast, looks at a project from the perspective of the entire
economy (“society”) and measures the effects of a project on the economy as a whole.
Con.t..
• In financial analysis we are interested in the items that entail monetary outlays.
• In economic analysis, we are interested in the opportunity costs for the country.
 Categories of Costs and Benefits

• A). Direct transfer payments are those items representing shift in goods and
services from one entity of the society to another without affecting the national
income.
Taxes net benefit is reduced. But the firm‟s payment of tax doesn‟t reduce the national income.
Subsidies the opposite direction from taxes.
Loans, and Debt services (the payment of interest and repayment of principal).
 Depreciation is the amount in decreasing of the total (initial) value of a material due to its
service value.
 B. Cost of input
• Physical goods construction materials, raw materials such as

 Concrete for irrigation canals,

 Fertilizer and pesticides for increasing production,
 Materials for the construction of homes in land settlement projects

• E.g., The price of shoe = 90 (producing value), there is 10 birr tax by government =
100birr.
• Economic cost is 90 birr. Financial cost is 100 birr.
• If government subsidizes 30 birr to project: Financial cost = 70 birr. Economic cost = 90
birr.
 Con.t..
• Labor skilled and unskilled

• The project is paying a wage rate of 15 birr per day per worker. Let the project employed
100 workers. The economic cost of the project is 1500 birr per day. Assume also each 100
labour was producing 10 birr value of output per day before being employed in the
project. Then economic cost of using labour will be 1000.

• The country is losing 10 birr per day because the project takes these workers. The
10 birr value is called the opportunity cost of labour.

• Opportunity cost is the amount of income forgone from the next best alternative use.
• Land to be used for an agricultural project will not be difficult to identify.

• The problem is with valuation of land because of the very special kind of market
conditions that exist when land is transferred from one owner to another.

• In financial analysis, we directly take the market price if the use of these inputs involves
cash outlays. If there are no cash payments for some of these inputs, it will not be
considered as a cost.

• In economic analysis we take the opportunity cost of the land that the amount of income
would be obtained if the land was used for some other alternative use.

• Opportunity cost is the amount of income forgone from the next best alternative use.
 C. Contingency allowance
• A contingency allowance is the measure of the residual risks that exists with the project
relative to achieving the project objectives and is expressed as a level of uncertainty or
confidence.

• Sound project planning requires that provision be made in advance for possible adverse
changes in physical conditions or prices that would add to the baseline costs.

• Contingency allowances are thus included as a regular part of the project cost estimates.

• Physical contingency: allowance is a real cost & will reduce the final goods and services
available for other purposes, i.e. it will reduce the national income and, hence, is a cost to the
society.

• It cost in both financial and economic analysis.

 Con.t..
• Price contingency (Change in price):
• In turn, price contingency allowances comprise two categories, those for relative changes in price and those
for general inflation.
• In most practical cases, in project cost estimation it is assumed that there will be no relative changes in
domestic or international prices and no inflation during the investment period. It would clearly be
unrealistic to rest project cost estimates only on the assumptions of stable price.

• Relative changes in price - A rise in the relative cost of an item implies that its productivity elsewhere in
the society has increased, that is, its potential contribution to national income has risen.

• Relative change in price of inputs affects the relative value of inputs and also affects value of output.

• It considered as a cost in both financial and economic analysis because it is a real change.
• Inflation an increase in general prices of goods
• It considered as a cost in both financial not economic analysis because it is not real change it is simply a
nominal (supposed) change.
 D). Sunk costs
• Sunk costs are those costs incurred in the past upon which a proposed new
investment will be based.

• When we analyze a proposed investment, we consider only future returns to

future costs; expenditure in the past, or sunk costs, do not appear in both
financial and economic accounts.

• Money spent in the past is already gone; we do not have as one of our
alternatives not to implement a competed project.
 Tangible benefits of the project
• Increased production (output is marketed & consumption at home )
• Quality improvement; it accounts benefit in both financial and economic analysis this must be
reflected in the market price of the good.
• Change in time of sale; the product to be sold at a time when prices are more favorable.
• Change in location of sale; transport facilities
• Change in product form (grading & processing) ; add value
• Cost reduction (through mechanization); agricultural machinery to reduce labor costs
• Losses avoided; The „with and‟ without‟ project analysis tends to point out such costs avoided by
the project
 Externalities
• Secondary costs and benefits
• The agricultural projects often lead to creation of benefits and costs outside the project area.
Such type of costs and benefits are called secondary costs and benefits.

• It can lead to benefits created or costs incurred outside the project itself.
• Economic analysis must take account of these external, or secondary, costs and benefits so
they can be properly attributed to the project investment.

• Example
• Technological spill-over or technological externalities;
• negative or positive ecological effects in construction of dam: - it can increase spread of
schistosomiasis and malaria, it can increase/decrease in fish catches, many down-stream
effects, etc and
• multiplier effects of projects - if there had been excess capacity.
 Intangible costs and benefits
• Intangible costs and benefits are associated with almost every agricultural project.

• Intangible benefits
 Creation of job opportunities
 Better health and reduced infant mortality
 Better nutrition
 Reduced incidence of disease
 National integration
 National security, and etc.
• Intangible cost
 a project may displace workers
 It may increase disease incidences,
 It may increase regional income inequality
 It may destroy or reduce the scenic beauty of an area, etc.
• These are accounted in economic analysis at least in qualitative terms but not accounted in
financial analysis.
International effects
• Some external effects of projects may extend beyond the borders of the country
concerned.
• Effects on world prices of traded goods (favorable or adverse), environmental effects, etc
such external effects on other countries are similar in nature to the externalities within the
country and raise similar problem.
 With and without project comparison
• Project analysis tries to identify and value the costs and benefits that will arise with
the proposed project and compare them with the situation as it would be without
project.

• The difference is the incremental net benefit arising from the project investment.
• This approach is not the same as comparing the situation ''before'' and ''after'' the
project.

• E.g., If production without the project were to increase at 3%per year and with
the project at 5% per year, the project's contribution would be an increase of 2%
per year.
 Separable Components
• Sometimes a project consists of several interrelated subprojects or components.
• When the components are independent of each other, each component must be treated as if it were a
separate project and the analyst must determine whether each component increases or decreases the
project's net total present value.

• Any component that has a negative net present value should be dropped, even if the total net present
value of all the components is positive.
• . In other words, each separable component must justify itself as a marginal part of the overall
project.
• Appraising such a project requires several steps.

• First, each separable component needs to be appraised independently.

• Second, each possible combination must be appraised.
• Finally, the entire project, comprising all of the separable components, must be appraised as a
package.