What do you understand by Economic appraisal and social cost benefit analysis of a project?

The basic purpose of systematic appraisal is to achieve better spending decisions for capital and current expenditure on schemes, projects and programmes. This document provides an overview of the main analytical methods and techniques which should be used in the appraisal process. These techniques can also be used in the evaluation process. More detailed information on individual techniques can found in financial and economic textbooks, examples of which are listed at the end of this document and in other guidance material on the VFM portal.

An understanding of discounting and Net Present Value (NPV) calculations is fundamental to proper appraisal of projects and programmes. A good understanding of Cost Benefit Analysis (CBA), Internal Rate of Return (IRR), Multi Criteria Analysis (MCA) and Cost Effectiveness Analysis (CEA) is also essential for economic appraisal purposes.

Cost-Benefit Analysis

The general principle of cost benefit analysis is to assess whether or not the social and economic benefits associated with a project are greater than its social and economic costs. To this end, a project is deemed to be desirable where the benefits exceed the costs. However, should the benefits exceed the costs, this does not necessarily imply that a projects will proceed as other projects with a higher net present value (NPV) may be in competition for the same scarce resources. In addition, there are affordability constraints which mean that projects should not proceed even if the NPV is positive.

In cost-benefit analysis all of the relevant costs and benefits, including indirect costs and benefits, are taken into account. Cash values, based on market prices (or shadow prices, where no appropriate market price exists) are placed on all costs and benefits and the time at which these costs/benefits occur is identified. The analytic techniques outlined above (i.e. NPV method, IRR method, etc.) are applied using the TDR. The general principle of cost-benefit analysis is that a project is desirable if the economic and social benefits are greater than economic and social costs. It is vital that cost-benefit analysis is objective. Its conclusions should not be prejudged. It should not be used as a device to justify a case already favoured for or against a proposal. Factors of questionable or dubious relevance to a project should not be introduced into an analysis in order to affect the result in a preferred direction.