1 Introduction to cost-benefit analysis
1.1 Introduction
1.2 The Referent Group
1.3 The structure of the cost-benefit model
1.4 The use of spreadsheets in cost-benefit analysis
1.5 The rationale for public projects
1.6 The role of the analyst
1.7 Further reading
Exercises
Note
2 Project appraisal: Principles
2.1 Introduction
2.2 Project appraisal from an individual viewpoint
2.3 Investment opportunities in the economy as a whole
2.4 The algebra of NPV and IRR calculations
2.5 Annuities and perpetuities
2.6 The Rule of 72
Why it works
2.7 Economic depreciation and the annual cost of capital
2.8 Treatment of inflation in project appraisal
2.9 Incorporating a risk factor in the discount rate
2.10 Further reading
Exercises
Notes
3 Project appraisal: Decision-rules
3.1 Introduction
3.2 Discounted cash flow analysis in practice
3.3 Discounting and the time value of money
3.4 Using Annuity Tables
3.5 Using investment decision-making criteria
3.5.1 The Net Present Value (NPV) criterion
3.5.2 The Benefit-Cost Ratio decision-rule
3.5.3 The Internal Rate of Return (IRR) criterion
3.5.4 Problems with the IRR decision criterion
3.5.5 Problems with the NPV decision criterion
3.6 Using spreadsheets
3.7 Further reading
Exercises
Note
4 Private cost-benefit analysis: Financial appraisal
4.1 Introduction
4.2 Benefits and costs measured as cash flows
4.2.1 Identifying project inputs and outputs
4.2.2 Valuing inputs and outputs at market prices
4.2.3 Characteristics of cash flows
4.3 Inflation and relative prices
4.4 Incremental or relative cash flows
4.5 Capital costs and the treatment of depreciation
Fixed investment
Working capital
4.6 Interest charges, financing flows and cash flow on equity
Example: Calculating the return on total investment, the cost of debt finance and the return on equity
4.7 Taxation and after-tax net cash flows
4.8 The discount rate
4.9 Summary of the relationship between the Market Analysis and the Private Analysis
4.10 Derivation of project private cash flows using spreadsheets
Worked example: National Fruit Growers (NFG) project
Step 1: Setting up the “Key Variables” table
Step 2: Setting up the project’s cash flow for the Market Analysis
Step 3: Setting up the cash flow for the financing of the project
Step 4: Calculating business income taxes and after-tax flows
Step 5: Deriving the Private (after-tax) net cash flow
4.11 Further reading
Appendix to Chapter 4
Case study of International Cloth Products1
ICP Project
1 Introduction
2 The market
3 Investment costs
4 Raw materials
5 Direct labour force
6 Fuel, water, spare parts
7 Insurance and rent
8 Financing
9 Taxes and incentives
10 Location in “deprived areas”
Some solution spreadsheet tables for the ICP case study
Exercises
Note
5 Cost-benefit analysis and economic efficiency
5.1 Introduction
5.2 The competitive market
5.3 Shadow-pricing project inputs and outputs
5.4 Shadow-pricing marketed inputs
5.4.1 Materials
5.4.2 Labour
5.4.3 Capital
5.4.4 Land
5.4.5 Rules for shadow-pricing marketed inputs
5.5 Shadow-pricing marketed outputs
Output subject to a tax
Output subject to a subsidy
Output supplied by a monopoly
Output of rental units
Time saved
5.5.1 Rules for shadow-pricing marketed outputs
5.6 The efficiency pricing rules: summary
5.7 Corrective taxation: the modified efficiency pricing rules
5.8 How to determine which pricing rule to follow
5.9 Shadow-pricing public funds
The opportunity cost of bond finance
The opportunity cost of funds obtained from a tax increase on labour income
5.10 Shadow-pricing foreign exchange
5.11 The discount rate
5.12 Worked examples
5.12.1 Efficiency analysis of the National Fruit Growers (NFG) project
5.12.2 Cost-benefit analysis of the 55 mph speed limit
5.13 Further reading
Appendix to Chapter 5
Economic Efficiency Analysis of the ICP case study
Cost of capital goods
Cost of labour
Cost of utilities
Cotton and yarn inputs and outputs
The Efficiency Analysis
Exercises
6 The distribution of project net benefits
6.1 Introduction
6.2 How to identify Referent Group net benefits in practice
Information provided by financial flows
Information provided by shadow-prices
6.3 Some examples of the classification of net benefits
6.3.1 Shadow-prices on project inputs
6.3.2 Shadow-prices on project outputs
6.4 Corrective taxation
6.5 Further examples
6.6 Lessons from the examples
6.7 Worked example: Referent Group Analysis of National Fruit Growers’ (NFG) project
6.8 Further reading
Appendix 1 to Chapter 6Referent Group net benefits in the ICP case study
Referent Group net benefits
The discount rate
Comparing alternative scenarios
Appendix 2 to Chapter 6
Incorporating the public funds cost premium in the ICP case study
Exercises
Note
7 Consumer and producer surplus in cost-benefit analysis
7.1 Introduction
7.2 Real versus pecuniary effects
7.3 Consumer surplus
7.3.1 Aggregating consumer surplus measures
7.3.2 The significance of income distribution
7.4 Producer surplus
7.5 Accounting for output price changes
7.5.1 Benefits of urban transport projects
7.5.2 Benefits of worker training
7.5.3 Producer benefits from an irrigation project
7.6 Accounting for input price changes
7.7 Price changes in other markets
7.8 Classification of consumer and producer surplus changes
7.9 Further reading
Appendix 1 to Chapter 7
Allowing for an increase in the skilled wage in the ICP case study
Appendix 2 to Chapter 7
Compensating and equivalent variation
Exercises
8 Non-market valuation
8.1 Introduction
8.2 Causes of market failure
8.3 Valuing environmental costs and benefits
Environmental resources as public goods
Externalities and the environment
Total economic value
8.4 Incorporating non-market values in cost-benefit analysis
8.5 Methods of non-market valuation
8.5.1 The production approach
8.5.2 The utility approach
8.6 Revealed and stated preference methods of applying the utility approach
8.6.1 Revealed preference methods
8.6.2 Stated preference methods
8.7 Benefit Transfer and Threshold Analysis
8.8 Alternative approaches to environmental valuation
Deliberative Value Assessment
Multi-Criteria Analysis
8.9 Non-market valuation: the value of life
8.10 The pandemic
8.11 Climate change
The social cost of carbon dioxide emissions in cost-benefit analysis
8.12 Further reading
Appendix to Chapter 8
The annual benefits of the Virginia Creeper Trail as measured by the Travel Cost Method
Exercises
Notes
9 Uncertainty, information and risk
9.1 Introduction
9.2 The value of information
Sensitivity analysis
9.3 An abbreviated cost-benefit analysis
9.4 The option of delay
9.5 Calculating the value of information
9.6 The cost of risk
9.6.1 The theory of risk aversion
9.6.2 Dealing with project risk
9.7 Risk modelling
9.7.1 Use of discrete probability distributions
9.7.2 Joint probability distributions
9.7.3 Continuous probability distributions
9.8 Using risk analysis in decision-making
9.9 Modelling risk in spreadsheet applications using ExcelSim©
9.9.1 Modelling a “random walk”
9.10 Further reading
Appendix 1 to Chapter 9
Incorporating risk analysis in the ICP case study
Additional information
Entering the risk analysis data
The results of the risk analysis
Appendix 2 to Chapter 9
Using the @RISK© (Palisade) risk modelling program
Using @Risk© to model a random walk: the ICP case study
Some additional points to note when using @Risk©
Exercises
Notes
10 Valuing traded and non-traded goods in cost-benefit analysis
10.1 Introduction
10.2 Traded and non-traded goods
10.3 Valuing traded and non-traded goods and services
10.4 Worked example: domestic and international price structures
10.4.1 Evaluation of an import-replacing project in real terms
10.4.2 Evaluation of an import-replacing project in money terms
10.5 Summary of the two approaches to valuation: border versus domestic prices
10.6 The equivalence of the two approaches
10.7 Determinants of the shadow exchange rate
10.8 Further reading
Appendix to Chapter 10
Shadow-pricing foreign exchange in the ICP case study
Exercises
11 Appraisal of the distribution of project benefits and costs
11.1 Introduction
Interpersonal distribution
Inter-sectoral distribution
11.2 Measuring the degree of inequality
11.3 Alternative measures of income distribution
11.4 Policies to change the income distribution
11.5 The use of income distribution weights in project appraisal: some illustrative examples
11.6 The derivation of distribution weights
11.7 Distributional weighting in practice
The bottom-up approach
11.8 Worked example: incorporating income distribution effects in the NFG project
11.9 Inter-temporal distribution considerations
11.10 Further reading
Exercises
Notes
12 Economic impact analysis
12.1 Introduction
12.2 Multiplier analysis
12.2.1 The closed economy
12.2.2 The open economy
12.2.3 Crowding out
12.2.4 Cost-benefit analysis of fiscal stimulus
12.2.5 The employment multiplier
12.3 Inter-industry analysis
12.3.1 Inter-industry analysis and the national income multiplier
12.3.2 Inter-industry analysis and employment
12.4 General equilibrium analysis
12.5 Case study: the impact of the ICP Project on the economy
12.6 Further reading
Appendix to Chapter 12 The annual economic impact of the Virginia Creeper Trail
Exercises
13 Writing the cost-benefit analysis report
13.1 Introduction
13.2 Contents of the report
13.2.1 The executive summary
13.2.2 The introduction
13.2.3 The methodology
13.2.4 The analysis
13.2.5 The conclusion
13.3 Other issues
Appendix to Chapter 13 Report on International Cloth Products Ltd: Spinning Mill proposal prepared by Angela Mcintosh1
Executive summary
4 Conclusion
Note
Appendix 1: Case study assignments
Appendix 2: Discount and annuity factors
Glossary
Index

Now in its third edition, Cost-Benefit Analysis has been updated, offering readers the perfect introduction to project, programme and policy appraisal using basic tools of financial and economic analysis.
The key economic questions of any social cost-benefit analysis are: do the benefits of the project or policy exceed the costs, no matter how widely costs and benefits are spread, and irrespective of whether or not project impacts, such as environmental effects, are reflected in market prices? And which group or groups of individuals receive the benefits and which bear the costs? This book addresses these questions with an emphasis on putting the theory presented in the book into practice.
This third edition has several attractive features:
Readers are encouraged to develop their own skills by applying the tools and techniques of cost-benefit analysis to case studies and examples, including an analysis of a project which is developed throughout the book.
The book emphasizes the use of spreadsheets which are invaluable in providing a framework for the cost-benefit analysis.
A dedicated chapter provides guidance for writing up a report which summarizes the analysis which has been undertaken.
New pedagogical features, including Technical Notes and Examples, have been added as an aid to readers throughout the text.
An appendix provides 14 additional case studies which can be developed in class or as assignment projects.
Additional material for instructors and students is provided through Support Material maintained by Routledge.
This updated edition is an ideal text for a course on cost-benefit analysis where the emphasis is on practical application of principles and equipping students to conduct appraisals. It is also a useful handbook for professionals looking for a logical framework in which to undertake their cost-benefit analysis work. ---provided by publisher