Matakuliah
Tahun
Versi
:J0464 / Business Feasibility Study
: 2007
: Revisi 3
Lecture 2
analysing economy &
finance
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 MATERIAL
The difference in evaluating financial and economy
analytics
 Financial costs and other costs
 Benefits of projects
 Price prediction
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Reading Book :
Kadariah (2001), Evaluasi Proyek, Analisis
Ekonomi, Edisi dua, Lembaga Penerbit
FE.UI, Jakarta. Bab 1. Hal 1 – 17.
Online Reading :
1. http://www.adb.org/Documents/Guidelines/Eco
_Analysis
2. http://www.indiainfoline.com/bus_feasibility
3. http://www.fhwa.dot.gov/Economic_Analysis_p
rime
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 Project
 An entity of activities that uses resources
in order to achieve benefit
 Activity that costs money with a hope to
achieve something in the future, and can
be planned, financed and done as a unit
 Goal
To evaluate the investment value
 A Few Project Analysis
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1. Technical Aspects
2. Managerial & Administrative Aspects
3. Organizational Aspects
4.
Commercial Aspects
5.
6.
Financial Aspects
Economy Aspects
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1.
Technical Aspects
Analysis of input and output are about goods
and services that are needed and produced
from the project
2.
Managerial & Administrative Aspects Staff
ability to run large scale administrative
activities
3.
Organizational Aspects
Link between authority and responsibility
can be seen very clearly
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4.
Commercial Aspects
Input demand analysis (Gods & Services) that are
needed by the project
5.
Financial Aspects
Investigating the difference in costs and the
project’s revenue earnings
6.
Economy Aspects
Investigating whether the project has a big role for
the economy development as a whole
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 Difference of Financial Analysis
and Economy Analysis
1.
Prices
Economy analysis uses shadow prices or accounting
prices, however financial analysis uses market price
2.
Costs
In economy analysis, costs in the project inputs are
the benefits that were lost in the economy
3.
Payment Transfer
a. Tax
b. Subsidy
c. Interest
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 Costs that are not counted as cost
within calculating the cost benefit economy
1.
Sunk Cost
Costs that has been spent before a decision has
been taken to do a project
2.
Decrease in value
Decrease in value isn’t included in the real costs
3.
Debt paying and its interests
Counted as costs if :
a. it is at the time of the investment
b. it is at the time of debt payment and its interest
4.
Technical study and feasibility study
Considered to be a sunk cost
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Other than those costs, there are some things
that doesn’t count as costs in finance, however
it’s regarded as opportunity cost in economy
costs
1. Land
 Land is used in a project
 Land “Opportunity cost” can be in :
i. Neto production value that are lost
ii. Value of land rent
iii. Estimation in the ability of the land
for producing
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2. Employment
 The difference in skilled labor and unskilled labor
 Usually the ones that are valued as shadow wage
rate are the unskilled labors
 Addition of one employee doesn’t cause addition of
production. Which means, addition of employment has
a product marginal value of zero. That means
opportunity cost of the employee is zero.
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3. Cost of tools and contruction resources
 Are there goods to be traded?
If there is, the marginal price has to be determined.
For Example : CIF for the imported goods, FoB for the
exported goods. Make sure that a double calculation
doesn’t happen in a project
 Are there any salvage value or left over cost at the end
of the project’s age?
Basically these values are not as big, compared
to the benefit value of the project neto
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 2 Things that influences project values :
1. Short period analysis
2. Capital value item is much bigger compared to the
benefit way.
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4. Interest During Construction

This interest isn’t counted as economic costs,
but if the cost investment is counted during
debt and interest payment therefore it has to
be counted as an economic cost.
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5. Operational & Maintenance Cost
 Is a cost after the construction period, there is
a decrease cost for routine needs along the
project’s economy.
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6.
Replacement Cost
 Many project needs investment with different life spans,
therefore there are parts that has to be replaced and
are called replacement cost.
7. Unexpected Cost
 Is a cost that are spent when there’s a possibility of
miscalculation.
 Intangible cost is a cost that can’t be stated clearly.
For Example : air polution, water polution, noise, etc.
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 Project Benefits
1. Direct Beneftis
 Increase in production / Output
1. Increase in product physically
2. Quality Improvement of a product
3. A change in location and time planned
4. Change in grading & processing.
 Decrease in cost, can be in :
1. Profit from mechanization
2. Decrease in shipping cost
3. Decrease or avoiding non-profit
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2. Indirect Benefits
 benefits that appear outside the project
because there’s a realization of a project.
 Three types of indirect benefits :
1. Benefits that are caused by a project called
multiplier effect.
2. Benefits that are caused of large scale
ness.
3. Benefits that are caused of a secondary
dynamics.
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3. Intagible Benefits
Example :
 Change in the living environment.
 Improvement in earning distribtion.
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 Inflation
If infaltion happened, usually an increase in
price / project benefit is faster than the
increase of input price / the cost, therefore
inflation has caused neto project benefit that
seems bigger if it is measured as the basic
price around.
Thank You,..
See you in lecture number
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