Corporate Fin Mgt NDLM.PDF

Learning Unit - 3

Reading material

COST BENEFIT ANALYSIS

Cost-benefit analysis is based on welfare theories developed by various economists.
Here we will not be dwelling on the historical development of the welfare concept. Our
focus will be on undertaking Cost Benefit Analysis with reference to a given project.

A given project will have a definite area and definite customers. In theory, before
launching a project the following points must be considered:-

• The individual preference with reference to a need or quantum of need must be
  identified and such individual needs converted into social preferences or social needs.
  This will be the basis of identification of social weightages with reference to the
  proposed projects.


• A system must be developed to make out or to identify social preferences.


• The likely direct and indirect benefits from a project must be estimated and the
  beneficiaries identified. To what extent these beneficiaries utilise these direct/indirect
  benefits and to what extent these beneficiaries will pay towards it must be ascertained.


• The capacity and willingness to pay, and the quantum of payment must be estimated.
  To analyze the willingness to pay, consumer surplus must be worked out, i.e., the
  relationship between market prices and willingness to pay.


• In case of some projects, a situation may arise that the people who are not likely to get
  any benefits, may also have to share the expenses of social projects. If so, the extent of
  their share must be estimated. In developing countries from the point of balanced
  regional growth or from the angle of socio-economic justice, this kind of approach may
  be inevitable.


• Regarding the sharing of expenses, the other situation may also arise, where the present
  generation may have to incur the burden of expenses on a project for the benefit of the
  future generation. Conversely, the present generation may implement a project, get its
  benefits, and pass on the liability to the next generation.


• The direct loss and indirect loss to society must be analyzed


• The direct cost and indirect cost of the proposed project must be analyzed.


• Changes in distribution of benefits from a project should be measured.