Post on 30-May-2018
8/14/2019 Financial and Economic Analysis Part 2 XG
1/33
Ghent University Department Agricultural Economics
Project Management
Financial and economic analysisof investment projects
8/14/2019 Financial and Economic Analysis Part 2 XG
2/33
Essential questions
Firms ability to meet its obligations Evaluate the return generated by the
investment
8/14/2019 Financial and Economic Analysis Part 2 XG
3/33
Balance sheet Balance sheet describes on the one
hand the property of a firm (assets)and on the other hand the way inwhich these assets are financed(liabilities)
Assets are always equal to liabilities Balance sheet is important for the
need of financial needs (financing)
8/14/2019 Financial and Economic Analysis Part 2 XG
4/33
Balance sheet
Assets Fixed assets: investments in land,buildings, machinery,
Current assets: stocks, accountsreceivable, cash, short term deposits, ...
8/14/2019 Financial and Economic Analysis Part 2 XG
5/33
Balance sheet Liabilities: How assets have been financed
Share capital and reserves Long term liabilities (>1 year): loans Short term liabilities (
8/14/2019 Financial and Economic Analysis Part 2 XG
6/33
Financial ratios
Financial, solvency, profitability Based on the balance sheet or profit
and loss account
8/14/2019 Financial and Economic Analysis Part 2 XG
7/33
8/14/2019 Financial and Economic Analysis Part 2 XG
8/33
Liquidity Current ratio: current assets/current liabilities
0.8-2.0; >2=poor cash management
8/14/2019 Financial and Economic Analysis Part 2 XG
9/33
8/14/2019 Financial and Economic Analysis Part 2 XG
10/33
Profitability Operating profit/turnover Profit before interest and taxes/fixed
assets
8/14/2019 Financial and Economic Analysis Part 2 XG
11/33
8/14/2019 Financial and Economic Analysis Part 2 XG
12/33
Economic analysis
Why a socio-economic analysis? Tax instruments weak Income distribution distorted=> Much broader approach compared to a
financial analysis (individual organisation)
8/14/2019 Financial and Economic Analysis Part 2 XG
13/33
Economic analysis
5 phases:1) Financial analysis2) Shadow prices to obtain net benefits3) Project effects on savings and investments
4) Project impact on income distribution5) Social value/analysis of products used/produced
8/14/2019 Financial and Economic Analysis Part 2 XG
14/33
Economic analysis
Social cost of a resource = total cost of the usePrivate cost (market cost)External cost (loss of welfare)
Social benefits: value of benefits for society of using the resources
Social cost-benefit analysis of different options:comparing opportunity costs or the willingness-to-pay for the project
8/14/2019 Financial and Economic Analysis Part 2 XG
15/33
Shadow prices Shadow prices = real value for society as a whole
= after adjusting for distortions= opportunity cost= value of its best alternative
Examples: labour, fuel, milk
8/14/2019 Financial and Economic Analysis Part 2 XG
16/33
Problem: distorted markets In principle market prices reflect opportunity costs
of resources or WTP But: markets are distorted because of
interventions by public authorities (e.g. currency value =>use of shadow prices)
project may influence market (corrected prices)
externalities (welfare effects) Financial analysis needs to be corrected for these
distortions
8/14/2019 Financial and Economic Analysis Part 2 XG
17/33
Why market distortions? Inflation Overvalueing currencies Labour market Imperfect capital markets Large scale projects Inelasticity of demand for export products Protectionism: import levies & export subsidies Lack of savings or public income Unbalanced distribution of income Externalities such as environmental impact
8/14/2019 Financial and Economic Analysis Part 2 XG
18/33
Principles in calculating SPs? World price approach:
- free trade on international markets- but currencies artificial level, labour,
Opportunity cost approach:- for inputs: withdrawing resources
- for outputs: benefit of alternative project, WTP Combining approaches:
- international oriented projects -> world market- locally oriented projects -> opportunity costs
8/14/2019 Financial and Economic Analysis Part 2 XG
19/33
Steps in determining SPs?
1. Identify tangible and intangible goods
2. Eliminate all direct transfer payments3. Value traded items4. Value non-traded items
8/14/2019 Financial and Economic Analysis Part 2 XG
20/33
8/14/2019 Financial and Economic Analysis Part 2 XG
21/33
8/14/2019 Financial and Economic Analysis Part 2 XG
22/33
8/14/2019 Financial and Economic Analysis Part 2 XG
23/33
Traded items Border prices such as CIF, FOB increased with
transportation and marketing costs (at project border) Parity prices: shadow price = alternative on
international markets 4 situations:
- inputs are imported = CIF + local costs- inputs are exported without project = FOB- outputs are exported = FOB- outputs are substitute imports = CIF + local costs
8/14/2019 Financial and Economic Analysis Part 2 XG
24/33
8/14/2019 Financial and Economic Analysis Part 2 XG
25/33
8/14/2019 Financial and Economic Analysis Part 2 XG
26/33
8/14/2019 Financial and Economic Analysis Part 2 XG
27/33
Non-traded items (1) CIF-price > local production cost > FOB because of
public intervention Use of market prices: project production is relatively
small; locally produced input from industry working atfull capacity
New price => benefit for old users & correct price for new users => (new + old price)/2 Output substitution => resources saved in the other
market
8/14/2019 Financial and Economic Analysis Part 2 XG
28/33
Non-traded items (2) Input from industry with overcapacity => opportunity
cost = marginal variable cost (not fixed cost) Combination of traded and non-traded goods Non-produced items such as labour and land
8/14/2019 Financial and Economic Analysis Part 2 XG
29/33
Shadow exchange rate
When governments intervene in financialmarkets, the prices expressed in local currencymay not reflect the real value of input or output
Example: custom duties of 20% Use of parity prices
8/14/2019 Financial and Economic Analysis Part 2 XG
30/33
Negative externalities
Cause a loss of welfare to (a group of)individuals
Are not compensated The size of the problem depends on:
The number of individuals affected The scarcity of the resource The capacity of regeneration
8/14/2019 Financial and Economic Analysis Part 2 XG
31/33
Internalisation of costs
Problem: private individuals only look at privatecosts and benefits
necessary to internalize the external cost Internalisation of cost can be:
Endogeneous (scarcity) Exogeneous (command- and control measures like
standards or norms)
8/14/2019 Financial and Economic Analysis Part 2 XG
32/33
Social benefitsSocial benefits = Total Economic Value (TEV)
TEV = UV + EV + OV + QOVWith UV = use value
EV = existence value
OV = option valueQOV = quasi option value
8/14/2019 Financial and Economic Analysis Part 2 XG
33/33
Measuring non-market values
The same principle as in case of distorted marketscan also be applied in case there is no market(externalities): Measuring the WTP (for goodimpacts) or WTA (willingness-to-accept) for badimpacts
Possible methods: hedonic prices (e.g. house price related to landscape) travel cost method contingent valuation