Drawing up Project Resource
Statements and Project Financial
Statements
Today’s Lecture
Types of prices
 Types of projects
 Directly productive and indirectly
productive projects
 Making Resource statement

Constant and Current prices
Constant prices (valued at
specified set of prices)
Current Prices (forecast
prices in future years)

Helpful when project is
long term

Helpful when project is
short term

Useful for decision making

Used for implementation of
projects

Using constant prices
ensures that the future
costs and benefits of the
identified project
alternatives are estimated
in the same units as the
costs and benefits
measured in year 0.

Can convert current prices
into constant by using
discounting technique
Financial and Economic prices

Financial prices are
the actual prices at
which inputs are
bought and outputs
sold and are used in
financial analysis.

In economic
analysis, where
prices are distorted
due to market or
government failure,
it is necessary to
impute the price that
reflects the real
economic value of
an input or an output
its shadow price.
Nominal and Real Prices

Nominal price is
interchangeably
used with current
price, includes the
effects of inflation

Real price can be
used
interchangeably
with constant price
Absolute and Relative price

Absolute prices
refer to the value
attached to an
input or output.

Relative prices
refer to the value
of an input or
output in terms of
each other.
Types of Projects
1. New Investments

Designed to establish a new productive process
independent of previous lines of production

New organization, financially independent of the
existing one

Eg. Setting up an IPP – government calls forth
application for tenders from independent entities
for the project
Types of projects
2.Expansion Projects

Involve repeating or extending an
existing economic activity with the
same output, technology and
organization.

Eg. Unilever decides to introduce a
new brand of shampoo
Types of projects
3.Updating Projects

Involves replacing or changing some
elements in an existing activity without
a major change in output.

Eg. Gul Ahmed Textiles buying new
state of the art machinery for textile
manufacturing in order to increase
productivity.
New Resources Versus
Resources without the Project

In all the three types of projects, the effect of using new resources
will have to be identified.
Q. How do you measure this effect?
A. By identifying the additional costs and benefits – resources that
would be used in the project over and above what would
otherwise be used, and the benefits over and above what would
otherwise have occurred without the project.

For a new project, the whole of output and the whole of costs will
be additional (incremental)

For expansion or updating projects, the effect of new resources
will have to be separated from the effects of resources without the
project
Directly productive and Indirectly productive
Directly Productive
Where the project costs
and benefits accrue to a
single organization eg.
Unilever’ launch of a new
shampoo
Indirectly Productive:

Where the benefits derived
from the project do not
accrue to organization
responsible for carrying out
the costs.

Most public infrastructure
projects like roads, sewerage
systems etc – benefits accrue
to users or the producers
while costs are borne by the
government.
Conventions used in drawing up
Project Resource Statements

In a project resource flow statement,
annual time periods are used.

Year end

In the series of consecutive annual time
periods over the life of the project,
investment costs will usually occur in the
earlier periods.

First period can be called year 0 or year 1
ELEMENTS of PRS
1) Investment Costs
These include
a) Initial Investments to implement the project
Refers to the costs involved in establishing and
commissioning a project eg. Land,machinery,
construction
These will be one of the largest items on the project
statement. For relatively small projects, they may
all occur in the first year. For larger projects like
dams and canals, these expenditures may be
spread out over two or even more years.
1) Investment Costs
b) Replacement expenditures – cost of equipment and other
investment items in the operating phase of a project in order to
maintain its productive capacity. Eg. Replacement of
machinery
Replacement expenditures are needed because each of the
investment items have a different operating life – eg. Land is
permanent and does not need replacement, but buildings,
machinery and vehicles they all need repair or replacement at
fixed intervals depending on their rate of depreciation.
Table 2.2. replacement costs are entered in the resource statement
a year before the replaced asset is acquired in order to ensure
continuous operations.
Items
Replacement period in
yrs
Land
preparation
Building
Machinery
Vehicles
40
8
3
0
1
2
3
4
5
6
7
8
9
10
20
60
40
12
40
12
12
12
1) Investment Costs
c) Residual Values
value of all the investment items at the end of the
project life
 Or final value of investment items if they are used for
some other project
 Calculated as purchase price less accumulated
depreciation.
 Residual Value = Initial Cost of an asset –
accumulated depreciation
 Although conventionally entered under investment
costs, residual values represent the value of assets
to the project at the end of its life and hence are
benefits
2. Operating Costs
Combination of fixed and variable costs.
 Diagram
 Depend on the level of output – increase
as capacity utilization increases.
 As output increases total operating costs
per unit of output go down (why?)

3. Working Capital


What is working capital?
Physical stock needed to allow
continuous production may have
residual value at the end of the period
Three elements of working capital
a) Initial stock of materials
b) Final stock of output
c) Work in progress

3. Working capital
a. Initial Stock
 Required at the beginning of the production process

As capacity utilization increases, output increases and initial stocks
requirements would increase until output reaches its maximum
sustainable level.

Initial stocks need to be purchased in advance of production, thus
will be entered in the year before the output level to which they
refer.
b. Final Stock
 The production period will give rise to final outputs that will be
stored for a period of time before distribution.

The level of final stock also depends on the level of annual
production. Eg one month of output valued at operating cost –
why not at market price
3)Working Capital
c. Work in progress
 At any point in time after the start of the project,
some materials will be passing through the
production process.
 Work in Progress is typically valued at ((Initial
stocks – Final stocks)/2) * (production period/
number of working days in a yr)
 Production period = number of days it takes for
initial stocks to get transformed into finished
product
Lahore School of Economics
Economic and Financial Analysis of Projects
BSc IV
Assignment No 1
Name:
___________________________________
Section:
Q. Use the given data to prepare annual operating costs of the project from ten years at given percentage of capacity utilization
Fixed Costs
Labor [administration]
150
Non tradable office supplies
100
Total Fixed costs
250
Variable costs
Material [traded]
250
Utilities [Non traded]
70
Labor [operating]
90
Total Variable costs
410
Total operating cost [TOC] = FC+ VC
Capacity utilization builds up over 4 years at utilization rate of 50, 70, 80, 100percent and is sustained at maximum capacity till the end
The project has a 1 year construction period and a 10 year operating period
Find annual change in working capital for 10 years and the corresponding residual value to be entered into the project statement[
if whole of the working capital is recovered in the last year] using the given assumption:
Initial stocks of materials equivalent to 2 months requirement for the following years production level [2 months worth of materials [variable].
Assume Initial stock [yr 1] = 2/12 of material in yr 2
Final Stocks of outputs equivalent to one month’s sales in current year [one month’s sales at total operating costs].
Assume Final stock in yr 1 = 1/12 of total operating costs in yr 1
Work in progress based on a production period of 25 days and a working year of 250 days, at current year’s production level
WIP yr 1= [material [yr1] +1/2{T. op cost yr 1- TFC yr 1- materials yr 1}]*[production period / total working days]

Year
Capacity
Utilization
Operating cost
FC
Variable power
Variable
materials
Variable labor
0
1
60%
2
70%
0
1
2
3
80%
4
90%
5
6
7
8
9
100% 100% 100% 100% 100%
10
100%
T. Op Cost
Year
Working Capital
Initial stock
Change in
Initial stock
Final stock
Change in
final stock
Work in
progress
Change in
Work in
progress
T.WC
Change in WC
3
4
5
6
7
8
9
10