Benefit-Cost Analysis - Financial And Economic Appraisal by Harry F. Campbell, Richard P.C. Brown

By Harry F. Campbell, Richard P.C. Brown

In the course of the textual content of this advent to profit price research, emphasis is on purposes, and a labored case research is gradually undertaken for instance of the analytical rules in operation. the 1st half covers uncomplicated conception and methods. half advances to fabric on across the world tradeable items and tasks that impact marketplace costs, and half 3 introduces exact issues comparable to the remedy of probability and uncertainty, source of revenue distributional results and the valuation of non-marketed items.

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Example text

The present value of the coal, using the 34 Benefit-Cost Analysis real rate of interest, r, is given by P0 Qt/(1+r)t. At the inflated price of coal its value at time t is given by P0(1+i)t Qt where i is the annual inflation rate. The present value, at the money rate of interest, m, is given by P0Qt (1+i)t/(1+m)t, or P0Qt [(1+i)/(1+m)]t. Since (1+i)/(1+m) is approximately equal to 1/(1+m–i), where m–i = r is the real rate of interest, the two procedures give essentially the same result. Are there any circumstances in which one approach is preferred to the other?

There are two Investment Appraisal: Principles 35 reasons why we don’t advocate this approach to costing risk: firstly, the “risk” involved has a very special time profile which projects in general may not exhibit; and, secondly, if the normal economic view of risk as variance around an expected outcome is taken, the procedure doesn’t deal with risk at all, but rather only with calculating the expected value of the outcome. Further Reading A classic work on the economic theory underlying investment analysis is J.

From the individual’s point of view the rate of interest offered by the bank is the opportunity cost of the funds to be invested – if she decided not to refurbish the house she could earn interest on her money in the bank. In the wider economy the market rate of interest also measures the opportunity cost of funds since some investor is willing to borrow at that rate (otherwise it wouldn’t be the market rate of interest); this means that if the NPV of the proposed project being appraised by the investor is positive using the market rate of interest as the discount rate, the present value of the benefits of the investor’s project is greater than its opportunity cost.

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