PROJECT FINANCIAL ANALYSIS
• PROJECT ECONOMIC ANALYSIS IS DEFINED
AS FOLLOWS
• DEFINITION
• Project economic analysis is defined as the economic analysis of the
prospective differences between technically feasible alternatives.
• A project economic study is concerned with alternatives that are
already established as technically feasible.
• Therefore project economic analysis is concerned with the
identification of an alternative which is most economically attractive.
• In the definition: prospective indicates that we are looking into the
future.
• Therefore, it should be born in mind that "In the future of course
nothing is certain”.
• Uncertainty increases with longer-range forecasts.
• The sensitivity of the outcome to changes on the parameters decreases
due to the discounting effects of interests.
,DEFINITION CONT..
• In the definition, the phrase "differences between ....
alternatives" is important because it indicates that values
that are common to all alternatives can be excluded.
• The exclusion of common values will simplify the project
economic analysis without biasing the outcome.
• METHODS OF PROJECT ECONOMIC ANALYSIS
ARE AS FOLLOWS:
• There are five methods that are commonly used in
project economic analysis and these are:
• Uniform annual cash Flow Method
• Present Worth Method
• Rate of Return Method
• Benefit Cost Ration Method
• Break Even Analysis
,DEFINITION CONT..
• TIME VALUE OF MONEY
• One of the basic concepts of project economic is that money
has a time value.
• That is a Rand/Dollar/Euro today is worth more than a
Rand/Dollar/Euro tomorrow.
• This is because money can be invested/deposited into a bank
savings account and earn interest annually or periodically.
• Example if you deposit $100.00 into a bank at 10% interest
rate you get $110.00 at the end of the year.
• By utilizing the concept of the time value of money, a sum of
money anytime in the future can be converted to an
equivalent sum at the present time.
• Conversely a sum today can be converted to an equivalent
sum occurring uniformly over a future period or at some
distinct time in the future.
, DEFINITION CONT..
• SUNK COST
• Another of the basic concepts of project economic is that of
“SUNK COST” which means that what has taken place in
the past is beyond control and has no relevance to project
economic decisions.
• Post expenditures can not be taken into consideration in a
project economic analysis.
• MINIMUM ATTRACTIVE RATE OF RETURN (MARR)
• MARR is a criterion of investment acceptability by the
investor.
• If the prospective returns from the potential investment
exceed the MARR the investor would proceed with the
investment.
• If the prospective returns from the potential investment are
less than the MARR the investor would reject the investment
• PROJECT ECONOMIC ANALYSIS IS DEFINED
AS FOLLOWS
• DEFINITION
• Project economic analysis is defined as the economic analysis of the
prospective differences between technically feasible alternatives.
• A project economic study is concerned with alternatives that are
already established as technically feasible.
• Therefore project economic analysis is concerned with the
identification of an alternative which is most economically attractive.
• In the definition: prospective indicates that we are looking into the
future.
• Therefore, it should be born in mind that "In the future of course
nothing is certain”.
• Uncertainty increases with longer-range forecasts.
• The sensitivity of the outcome to changes on the parameters decreases
due to the discounting effects of interests.
,DEFINITION CONT..
• In the definition, the phrase "differences between ....
alternatives" is important because it indicates that values
that are common to all alternatives can be excluded.
• The exclusion of common values will simplify the project
economic analysis without biasing the outcome.
• METHODS OF PROJECT ECONOMIC ANALYSIS
ARE AS FOLLOWS:
• There are five methods that are commonly used in
project economic analysis and these are:
• Uniform annual cash Flow Method
• Present Worth Method
• Rate of Return Method
• Benefit Cost Ration Method
• Break Even Analysis
,DEFINITION CONT..
• TIME VALUE OF MONEY
• One of the basic concepts of project economic is that money
has a time value.
• That is a Rand/Dollar/Euro today is worth more than a
Rand/Dollar/Euro tomorrow.
• This is because money can be invested/deposited into a bank
savings account and earn interest annually or periodically.
• Example if you deposit $100.00 into a bank at 10% interest
rate you get $110.00 at the end of the year.
• By utilizing the concept of the time value of money, a sum of
money anytime in the future can be converted to an
equivalent sum at the present time.
• Conversely a sum today can be converted to an equivalent
sum occurring uniformly over a future period or at some
distinct time in the future.
, DEFINITION CONT..
• SUNK COST
• Another of the basic concepts of project economic is that of
“SUNK COST” which means that what has taken place in
the past is beyond control and has no relevance to project
economic decisions.
• Post expenditures can not be taken into consideration in a
project economic analysis.
• MINIMUM ATTRACTIVE RATE OF RETURN (MARR)
• MARR is a criterion of investment acceptability by the
investor.
• If the prospective returns from the potential investment
exceed the MARR the investor would proceed with the
investment.
• If the prospective returns from the potential investment are
less than the MARR the investor would reject the investment
