Lecture 2 analysing economy & finance Matakuliah:J0464 / Business Feasibility Study Tahun: 2007 Versi: Revisi 3

 MATERIAL T  T he difference in evaluating financial and economy analytics F  F inancial costs and other costs B  B enefits of projects P  P rice prediction 02

Reading Book : Kadariah (2001), Evaluasi Proyek, Analisis Ekonomi, Edisi dua, Lembaga Penerbit FE.UI, Jakarta. Bab 1. Hal 1 – 17. Online Reading : 1. _Analysishttp:// _Analysis rimehttp:// rime 02

 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 02

 A Few Project Analysis 1.T 1.T echnical Aspects 2.M 2. M anagerial & Administrative Aspects 3. O 3. O rganizational Aspects 4. C 4. C ommercial Aspects 5. F 5. F inancial Aspects 6. E 6. E conomy Aspects 02

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 02

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 02

 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 02

 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 02

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 02

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. 02

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 02

 2 Things that influences project values : 1.Short period analysis 2.Capital value item is much bigger compared to the benefit way. 02

Interest During Construction 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. 02

Operational & Maintenance Cost 5.Operational & Maintenance Cost   Is a cost after the construction period, there is a decrease cost for routine needs along the project’s economy. 02

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. 02

 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 02

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. 02

Intagible Benefits 3.Intagible Benefits Example :  Change in the living environment.  Improvement in earning distribtion. 02

 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. 02

Thank You,.. See you in lecture number See you in lecture number 03