This document discusses cost-benefit analysis for forestry projects. It begins by defining appraisal and outlining the nature of forestry projects, which have long production periods as trees are both the production unit and product. Common objectives of forestry projects include improving economic efficiency, social conditions, stability, and the environment. The stages of cost-benefit analysis are then outlined, including defining the issue, identifying options and costs/benefits, adjusting for future values, assessing risks, distributional impacts, and using techniques like net present value to evaluate projects. Environmental impacts are an important consideration in cost-benefit analysis to account for externalities. Sensitivity analysis is also recommended to assess how sensitive results are to changes in key parameters.

1. SUBMITTED TO: SUBMITTED BY:
Dr. A. K. Gauraha Ashish Raghuvanshi
Om Netam and Jyotsna
Department Of Agricultural Economics Co.A Raipur ( C.G.)

2. INTRODUCTION
What is appraisal?
 Appraisal is the systematic analysis of the different
costs and benefits of a course of action, whether
economic, social, environmental or financial.
 It informs both the decision on whether to go ahead
and the choice between different ways of carrying out
an action.

3. THE NATURE OF FORESTRY PROJECTS
 A long production period (e.g., in the case of some
plantation projects)
 Trees are both, the production unit and the product.
 There is great flexibility in terms of when to harvest,
but little flexibility in terms of building up inventories.
It is because if the tree is harvested then a production
unit is lost.

4. COMMON OBJECTIVES OF
FORESTRY PROJECTS
 Improve economic efficiency, i.e., increase the aggregate
benefits (goods and services available for society) derived
from the use of the nation's limited resources.
 improve conditions for the poorer members of society (or
decrease the gap between rich and poor, e. g., through
employment creation)
 increase social, political and economic stability (e.g.,
through improving the balance of payments situation,
providing public services, or following sustained yield
policies, etc.)
 improve environmental conditions and land use.
 generate increased revenues for government which can be
used for various social needs.

5. STAGES IN APPRAISAL
I. Define the issue, assess the rationale for action and
set out objectives.
II. Identify and set out a range of options.
III. Identify the costs and benefits of the selected
options.
IV. Adjust costs and benefits for future changes in
values and prices.
V. Identify risks and uncertainty.
VI. Assess distributional impacts.

6. FINANCIAL AND ECONOMIC EVALUATION OF
AGRICULTURAL PROJECTS
Cost Benefits Analysis (CBA)
 Benefit Cost Analysis (BCA) is an economic tool for
government policy and investment project analysis used
widely.
 Can incorporate environmental impacts of
policies/projects within CBA to correct for market failure.
 “Social” appraisal of policies and projects, carried out by
aggregation of benefits from, and costs of a policy/project
over individuals and over time.
 Welfare theoretic underpinning: Economic efficiency with
a temporal dimension.

7. Cost Benefit Analysis
 Relates to the environment in three ways:
I. Projects/policies may have negative
environmental effects, i.e. negative externalities
(public and private)
II. Projects/policies may have positive externalities
(public)
III. Projects/policies may have both positive and
negative externalities (public and private)
 Externalities should be included in CBA in order
to correct for market failure
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8. Stages of CBA
 Stage 1: Definition of policy/project:
 The reallocation of resources being proposed
 The population of gainers and losers being considered
 Stage 2: Identification of policy/project impacts:
 Define all impacts that will result from policy/project
implementation
 Consider additionality (net impacts) and displacement
(crowding out)
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9. Stages of CBA
 Stage 3: Identification of economically relevant
impacts:
Environmental impacts of a policy/project are relevant
in CBA if either
 They change the utility of at least one person in the
society
 They change the quantity or quality of the output of
some positively valued commodity
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10. Stages of CBA
Stage 4: Physical quantification of relevant impacts:
 Determine physical amounts of costs and benefits and
when they occur in time
 Use environmental impact analysis to estimate the impact
of policy/project on the environment
 Estimations will be made with uncertainty, calculate the
expected value of costs and benefits
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11. Stages of CBA
 Stage 5: Monetary valuation of relevant effects
 All physical measures of impacts should be valued in
common units to be comparable
 Common unit = money
 CBA analyst must
 Predict prices for value flows extending into the future
 Correct market prices where they are distorted
 Calculate prices where non exists using environmental
valuation methods
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12. Stages of CBA
Stage 6: Discounting of costs and benefits:
 Once costs and benefits are expressed in monetary units
they should be converted to present value terms by
discounting
 PV= Xt[(1+r)-t]
where X= cost or benefit; r = discount rate; [(1+r)-t]
discount factor; t= time
 The higher the value of t the lower the discount factor.
 The higher the discount rate for a given t the lower the
discount factor.
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13. Stages of CBA
 Stage 7:Applying the net present value test:
 Apply NPV test to choose those policies and projects that
are efficient in terms of their use of resources
 Where Bt = benefits of the project at period t, Ct = the
costs of the project at period t, r = the discount rate, n =
the number of years over which the project will operate
 NPV is the present value of the project’s/policy’s net
benefit stream, obtained by discounting the stream of net
benefits produced by the project/policy over its lifetime,
back to its value in the chosen base period, usually the
present.
 If NPV>0 accept the project since it would improve
social welfare.
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14. Stages of CBA
 Alternatives to NPV
1. Benefit – Cost ratio (BCR): It is the ratio of
the sum of the project’s discounted benefits
to the sum of its discounted costs.
If BCR>1 then go ahead with the project.
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15. Stages of CBA
2. Internal Rate of Return (IRR):
Rate of interest which if used as the discount rate for a
project, would yield a NPV of zero. It is the discount rate at
which it would be just worthwhile doing the project.
So the IRR is the discount rate, r*, at which:
However IRR is a flawed measure of resources allocation
because many projects/policies generate multiple IRRs and
also because it cannot be used to compare projects/policies.
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16. Stages of CBA
 Stage 7: Sensitivity analysis:
 NPV test gives relative efficiency of a project given the
data on prices, environmental and economic impacts and
discount rate but any of these data might change due to
uncertainty.
 Recalculate NPV when the key parameters change to
discover which one(s) of them the NPV is most sensitive
to.
 Once the most sensitive parameter is identified direct
forecasting effort to improve best guess and more effort
to manage these parameters carefully.
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17. .