2.2 Social cost benefit analysis and financial analysis
- 2.1 Overview
- 2.2 Social cost benefit analysis and financial analysis
- 2.3 Benefits
- 2.4 External impacts
- 2.5 Costs
- 2.6 Present value and discounting
- 2.7 Time frame
- 2.8 Do minimum and benefit and cost differentials
- 2.9 Benefit cost ratios
- 2.10 Incremental cost benefit analysis
- 2.11 First-year rate of return
- 2.12 Uncertainty and risk
- 2.13 Alternatives and options
- 2.14 Packages
- 2.15 Transport models
- 2.16 Other inputs to funding allocation process
- 2.17 References
2.2 Social cost benefit analysis and financial analysis
Economic costs and shadow pricing
A financial analysis considers the monetary costs and revenues to the business contemplating the investment. These monetary costs are the prices of goods and services in the marketplace.
In many instances the market prices for goods and services do not equate to their economic costs (also termed national resource costs). This difference may occur from transfer payments, such as taxes, duties and subsidies, or of market imperfections such as monopolistic pricing or other factors.
It is necessary, when performing a cost benefit analysis, to substitute the market price of items with a value that takes account of these differences. This technique is termed shadow pricing.
The benefit values provided in this manual take account of the differences between market prices and national resource costs, and therefore do not require any adjustment.
All construction and maintenance cost estimates used in economic evaluations must exclude GST, so that they are national resource costs.
Social cost benefit analysis and financial analysis
For conventional business investment, an analysis is made of the initial investment costs against the revenue from sales, less operating expenses. If the returns on the investment justify the investment costs, and cash flow forecasts are satisfactory, then the venture is considered worthwhile from a business viewpoint. This is termed financial analysis.
Social cost benefit analysis (generally abbreviated to cost benefit analysis) is similar to financial analysis except that a national viewpoint is adopted in which the benefits and costs are those to the nation as a whole. This viewpoint is appropriate in the case of transport projects, which are undertaken on behalf of the nation and are publicly funded.
The analysis involves determining the various benefits and costs associated with each project alternative and option over a certain analysis period, to determine the relative economic efficiency of these alternatives and options. The results for the chosen alternative and option indicates whether the project is worthwhile from an economic efficiency viewpoint.