Economic analysis of projects

The basic economic problem facing all economies is that of allocating scarce resources to a variety of different uses in such a way that the net benefit to society is as great as possible. The tools of an economic analysis facilitate decision makers in examining the impact of a project on a society, an economy, an entity undertaking the project, on stakeholders and the risks and sustainability of the project on the welfare of the country. It assesses the benefits and costs of a project and reduces the investment risk. The most viable alternatives with benefits that outweigh costs and with technical, marketing, financial and economic feasibility and with the least environmental impacts are considered investible projects. In the infrastructure development sector, investment projects are assessed more in relation to their net contribution to the economic growth and development of a country. A feasibility study generally contains a description of the business, market feasibility, technical feasibility, financial feasibility and organisational feasibility. This chapter presents an economic analysis (sector, demand and alternative analyses), a benefit–cost analysis, investment decision criteria (benefit–cost ratio, economic net present value and economic internal rate of return, effectiveness analysis), shadow pricing, a risk and sensitivity analysis, a sustainability analysis and an environmental sustainability assessment.