This document discusses economic analysis and cost-benefit analysis for evaluating project development. It outlines the key phases and steps involved, including defining objectives, identifying and valuing costs and benefits, and comparing costs and benefits. For cost-benefit analysis specifically, it details the steps of identifying and valuing project costs and benefits in terms of economic prices, performing present value comparisons of costs and benefits, and selecting projects based on economic feasibility indicators and sensitivity analysis. Limitations are noted for applying economic analysis to certain social sector projects and those supporting multiple development objectives.

1. LA CONSOLACION UNIVERSITY PHILIPPINES
GRADUATE SCHOOL DEPARTMENT
NAME: Philip B. Yanson COURSE: Ph.D. ELM
SUBJECT: Financial Management
PROFESSOR: Dr.Danilo Fausto
REPORT ON: ECONOMIC ANALYSIS
ECONOMIC ANALYSIS
Phase of Project Development closely related to Economic Analysis:
 Market Analysis
 Environmental Analysis
 Financial Analysis
Steps involved in the application of Economic Analysis:
a. Definition of the set of development objectives.
b. Translation of development variables into a common denominator.
c. Identification and valuation of costs and benefits.
d. Comparison of costs and benefits; and
e. Recommendation on the selection of projects.
Method of Economic Analysis:
a. Cost-benefit analysis
COST-BENEFIT ANALYSIS
It has evolved as an attempt to rationalize the process of resource allocation.
Steps in cost-benefit analysis:
A. Identification of Project Costs And Benefits
1. Direct Costs
a. capital costs
i. land & other natural resources that have current alternatives uses.
ii. Detailed engineering & design
iii. Preparatory installation work.
iv. Cost of equipment, raw mats and supplies for constructions
v. Cost of building & auxiliary installations.
vi. Engineering & administrative cost during construction
vii. Organization costs
viii. Expenses of running-in-period
ix. Contingencies
b. Operating & Maintenance Cost
i. Raw mats & other supplies
ii. Energy & fuels
iii. Labor
iv. Rent & insurance
v. Depletion of natural resources

2. vi. Contingencies
2. Direct Benefits
3. Externalities, Secondary Benefits & Intangibles
4. Adjustment to Inputs form the Financial Statements
a. taxes & subsidies
b. financial charges, interest & amortization
c. depreciation
5. With and Without Analysis
6. Double Counting
B. Valuation of Costs and Benefits in Terms of Economic Prices
1. Choices Numeraire
2. Use of Shadow Prices
a. shadow price of foreign exchange
b. shadow price of labor
c. shadow price of land
d. opportunity cost of capital
3. Valuation Direct Costs
General Procedures for estimations:
a. The entire set of project inputs must be differentiated between those inputs that reduce the
supply to the other users and those inputs that would be supplied from increased production.
b. For inputs resulting in reduced supply to other users, the shadow price is the market selling price
appropriately adjusted for (i) value of rationed components; (ii) the effect of monopoly power in
buying or selling and (iii) the actual price impact of the supply reduction.
c. If the supply of inputs is obtained from expanded production, the relevant cost estimate is the
actual cost of production.
d. If some of the inputs are imported or are substitute for exports, the foreign exchange cost
involved corrected by the shadow price of foreign exchange should be estimated and any transport
costs and trade service margin should be added.
4. Valuation of Direct Benefits
General Procedure for estimations:
a. For outputs leading to additional supply or reducing the output of other local producers, the
shadow price is the market price corrected for the ff: effects of any rationing; monopoly power of
some buyers; and buyers; and actual price impact based on the size of the additional supply.
b. For goods that substitute for imports or add to exports, foreign exchange earnings or savings
involved are estimated and corrected by the shadow price of foreign exchange.
c. For goods/services that are supplied freely, the value placed by users on the facilities should be
estimated, i.e., what they would pay if they were to purchase the facilities.
5. Inflation and Relative Price Changes
C. Present Value Comparisons of Costs and Benefits, Sensitivity Analysis and Selection of Projects Based
on Derived Economic Feasibility Indicators
1. The social Discount Rate
2. Economic Feasibility Criteria
3. Sensitivity Analysis
4. Project Ranking for Investment Programming
LIMITATION IN THE USE OF ECONOMIC ANALYSIS
Certain sectoral programs and projects do not easily lend themselves to standard economic analysis, among
these are:
A. Social Sector Projects
B. Projects Supportive to Multiple Development Objectives