| CODE | ECN5014 | ||||||
| TITLE | Cost Benefit Analysis for Business | ||||||
| UM LEVEL | 05 - Postgraduate Modular Diploma or Degree Course | ||||||
| MQF LEVEL | 7 | ||||||
| ECTS CREDITS | 5 | ||||||
| DEPARTMENT | Economics | ||||||
| DESCRIPTION | This unit will introduce students to principles of Cost Benefit Analysis, beginning with traditional financial project appraisal. Students will then consider the economic concepts central to Cost Benefit Analysis and the main techniques that value project impacts. Students will also consider procedures for project selection and by the end of the unit students should be able to understand the fundamentals of CBA. An outline of the unit is shown hereunder: 1.1. Project identification. This module contains indications about how to start defining the general design and the logical framework of the project, consistently with the most common recommendations of CBA analysis, financial thresholds, and the project definition stated in the regulations. 1.2. Feasibility and options analysis. Practical recommendations are illustrated by simple concrete examples especially for the option analysis, distinguishing modal, technological, geographical and chronological options where applicable. 1.3. Financial analysis. Information about how to conduct a financial analysis will be given. Starting from the basic tables this module explains how to conduct the study, from the definition of the main items to include in the tables to the calculation of the FRR and FNPV (both of the investment and of the equity). The approach is strictly operative and some examples will be given in the form of case studies. The main technical issues to be solved when implementing the analysis are: • the choice of time horizon; • the determination of the total cost; • the determination of the total revenues; • the determination of the residual value at end year; • the treatment of inflation; • the financial sustainability; • the choice of an appropriate discount rate; • how to calculate the financial or economic rate of return and use it for the appraisal. 1.4. Economic analysis. Starting from the financial analysis and the table of financial flows, the aim is to assess a standard methodology for the three steps for the definition of the final table for the economic analysis: • correction for fiscal aspects; • correction for externalities; • the determination of the conversion factors. The module focuses on how to calculate the social costs and benefits of a project and how they can influence the final result. It also provides guidance on how to calculate the economic rate of return and to understand its economic meaning for project appraisal. 1.5. Multicriteria analysis. This module will cover situations in which the rate of return is insufficient as an impact indicator and complementary analysis is needed. 1.6. Sensitivity and risk analysis. The module gives a broad outline on the treatment of uncertainty in investment projects. 1.7. Case Study: Transport Sector. Study-unit Aims: Overall the module seeks to: - provide an overview of traditional financial project appraisal; - define the economic concepts of cost, benefit and net benefit; - examine how firms use non-priced environmental resources and generate externalities; - distinguish CBA from traditional financial project appraisal; - describe the rationale underlying each of the specialist financial economic valuation techniques; - outline the methodology of each technique; - identify the main strengths/weaknesses of each technique; - review the investment decision rules employed in CBA; - discuss sensitivity analysis in the context of CBA; - outline the issues associated with the choice of discount rate; - identify the limits of environmental CBA; - describe cost-effectiveness analysis and multi-criteria analysis as alternative tools for economic analysis. Learning Outcomes: 1. Knowledge & Understanding: By the end of the study-unit the student will be able to: - distinguish between the various stages of Cost Benefit Analysis; - distinguish between financial and economic appraisal; - apply the concept of economic cost and economic benefit; - apply multi-criteria evaluation and sensitivity analysis; and - apply the concept underlying Monte Carlo simulation. 2. Skills: By the end of the study-unit the student will be able to: - apply concepts (such as shadow pricing) and methods (such as multi-criteria analysis) appropriate to CBA and as managers differentiate between financial and cost benefit appraisal; - evaluate conclusions of any CBA especially when applied in the appraisal of EU funded projects. This will be possible through reference to a case study on transport use @risk software for Monte Carlo simulation. Main Text/s and any supplementary readings: Main Text - Document 4: Guidance on the methodology for carrying out cost-benefit analysis, The new programming period 2007 – 2013, Brussels. - Florio, M., Vignetti, S., 2006, Cost-benefit analysis of infrastructure projects in an enlarged European Union: Returns and Incentives, Economic change and restructuring, 38:179-210. Supplmentary Readings: - Belli, P., Anderson, J. R., Barnum, H.N, Dixon, J. A., Tan, J-P, 2001, Economic Analysis of Investment Operations. - Analytical Tools and Practical Applications, WBI, World Bank, Washington D.C. Boardman, A.E., 2006, Cost-Benefit Analysis: concept and practice, 3rd edition; Pearson Prentice Hall, Upper Saddle River, New Jersey. - Dasgupta, P., Marglin, S, Sen, A.,1972, Guidelines of project evaluation, Unido, Vienna. - De Rus, G., Nash, C.A, 2007, In what circumstances is investment in HSR worthwhile?, ITS Working paper, University of Leeds, Leeds. - Drèze, J., Stern, N., 1987, The Theory of Cost-Benefit Analysis, in Auerbach, A., Feldstein, M. (eds), Handbook of Public Economics, vol.. 2, Amsterdam. - European Commission, 2003, WATECO - Common Implementation Strategy for the Water Framework Directive, Guidance Document No 1 ‘Economics and the Environment – The Implementation Challenge of the Water Framework Directive’ produced by Working Group 2.6. - European Commission, 2004, Green Paper on Public-Private Partnerships and Community Law on Public Contracts and Concessions, Brussels. - European Commission, 2004, HEATCO: Developing Harmonised European Approaches for Transport Costing and Project Assessment, Deliverable 5, Brussels. - European Commission, 2007, EVA-TREN: Improved decision-aid methods and tools to support evaluation of investment for transport and energy networks in Europe, Deliverable 2, Brussels. - European Commission, 2008, IMPACT: Internalisation Measures and Polices for All external Cost of Transport, Handbook on estimation of external costs in the transport sector, Version 1.1, Brussels. - European Commission, DG Economic and Financial Affairs, 2007, Evaluation of the performance of network industries providing services of general economic interest, Brussels. - European Commission, DG Regional Policy, 2003: Guidelines for Successful Public – Private Partnership, Brussels. - European Commission, DG Regional Policy, 2006, Methodological Working. - European Commission, DG Energy and Transport, 2006, EU Energy and Transport in Figures 2006, Part 3: transport, Brussels. - European Commission, ESA95, 2002, Manual on Government Debt and Deficit, European Communities, Luxembourg. - Evans, D., 2006, Social discount rates for the European Union: new estimates, in Florio, M. (ed.), 2007a. Florio, M., 2007a, Cost-Benefit Analysis and Incentives in Evaluation. The Structural Funds of the European Union, Edward Elgar, Cheltenham. - Florio, M., 2006, Cost-Benefit Analysis and the European Union Cohesion Fund: On the Social Cost of Capital and Labour, Regional Studies, 40(2): 211-224. 251 - HM Treasury, 2003, Appraisal and evaluation in Central Government. The Green Book, Treasury Guidance, London. - HM Treasury, 2003, How to construct a Public Sector Comparator, Technical Note 5, Private Finance Treasury Task Force, London. - HM Treasury, 2006, PPP- Value for money assessment guidance, The Stationery Office, London. - HM Treasury, 2006, Stern Review on the economics of Climate Change, London. - Kindler, J., Russel, C.S., 1984, Modelling water demand, Academic Press Inc., New York. - Ley, E., 2007, On the Improper use of the Internal Rate of Return in Cost-Benefit Analysis, World Bank Institute, Washington D.C. - Little, I.M.D., Mirrlees, J.A., 1974, Project appraisal and planning for developing countries, Heinemann Educational Books, London. - Saerbeck, R., 1990, Economic appraisal of projects. Guidelines for a simplified cost-benefit analysis, EIB Paper n.15, European Investment Bank, Luxembourg. - Squire, L., Van der Tak, H., 1975, Economic analysis of projects, Johns Hopkins University Press, Baltimore. |
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| STUDY-UNIT TYPE | Lecture | ||||||
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| LECTURER/S | Philip Von Brockdorff |
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The University makes every effort to ensure that the published Courses Plans, Programmes of Study and Study-Unit information are complete and up-to-date at the time of publication. The University reserves the right to make changes in case errors are detected after publication.
The availability of optional units may be subject to timetabling constraints. Units not attracting a sufficient number of registrations may be withdrawn without notice. It should be noted that all the information in the description above applies to study-units available during the academic year 2025/6. It may be subject to change in subsequent years. |
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