Handbook on Cost-Benefit Analysis (CBA)

of Public Investment Projects

Applications with Excel Examples

Strengthening Public Investment Management System Project

Programming Division
Bangladesh Planning Commission
Government of the People’s Republic of Bangladesh
January 2024
Handbook on Cost-Benefit Analysis (CBA)
of Public Investment Projects
Applications with Excel Examples
Published by
Strengthening Public Investment Management System (SPIMS) Project
Programming Division
Bangladesh Planning Commission
Government of the Peopleʼs Republic of Bangladesh
Sher-e-Bangla Nagar, Dhaka-1217, Bangladesh.

First Published: February 2024

Copyright @ SPIMS Project, Programming Division, Bangladesh Planning Commission,

2024

A Note on this Edition:

This document will be available in the Bangladesh Planning Commission Website for
general access: http://www.plancomm.gov.bd/

Authors:
1. JICA Expert Team (JET), SPIMS Project.

Reviewers:
1. Muhammad Anwar Uddin, Joint Chief, PIM Reform Wing, Programming Division,
Planning Commission.
2. Mohammad Alamgir Hossain, Deputy Chief, PIM Reform Wing, Programming
Division, Planning Commission.

Cover Page Design

1. JICA Expert Team (JET), SPIMS Project.

Wordclouds.com Website: https://www.wordclouds.com/
 Preface

The Users of this document are the desk officers responsible for 1) preparation of
project proposal at the Ministry/Division/Agency, 2) project assessment at the
Ministry/Division, and 3) project appraisal at the Sector Division of the Planning
Commission (hereafter called the “User”).

This Handbook is to help its Users to develop a hands-on understanding of how to

conduct a cost-benefit analysis (CBA) of a public investment project, using an Excel
spreadsheet model and the User can also refer to when preparing, assessing, and
appraising the Financial and Economic Analysis, especially the DPP item no 18.0.

This Handbook consists of the following three chapters and annexes.

Chapter I: Introduction. This chapter will help the User to understand the background
and objectives of the Handbook on Cost-benefit Analysis.

Chapter II: Concepts, Methods, and Definitions. Chapter II explains and reviews the
key concepts, definitions, and methodology related to CBA. This chapter will help the
User to understand the specific points to consider in preparing, assessing, and appraising
the Cost-benefit Analysis for the similar nature projects. A list of parameter and
assumption are given to consider to help the User to identify the parameter and
assumption for similar nature of project.

Chapter III: Step-by-Step Procedures of CBA for Public Investment Projects.

Chapter III demonstrates how to apply CBA techniques to sample cases of power
distribution, power transmission, and rural infrastructure development projects, using the
Excel examples that accompany this Handbook. This chapter will help the User to conduct
a Cost-benefit Analysis and getting the results of the similar nature of projects by
inputting/changing the data/parameters value/assumptions. In addition, this chapter
also helps the User to conduct the sensitivity analysis by inputting/changing the
data/parameters value/assumptions.

Limitations of this Handbook

This Handbook DOES NOT give a comprehensive description of Cost-benefit Analysis. For
example, the following contents are not included, 1) the history, background and
importance of Cost-benefit Analysis, 2) how to conduct Cost-benefit Analysis, 3) the
relation between Ministry Assessment Format (MAF) / Sector Appraisal Format (SAF) and
Cost-benefit Analysis, and 4) the relation between DPP, Feasibility Study and Cost-benefit
Analysis.

i
ii
iv
 Table of Contents

1. Chapter I: Introduction.......................................................................... 1
1.1. Background........................................................................................ 1
1.2. Objective of the Handbook ................................................................... 1

2. Chapter II: Concepts, Methods, and Definitions ...................................... 3

2.1. Role of Cost-Benefit Analysis in the Assessment/Appraisal of Public
Investment Projects...................................................................................... 3
2.1.1. What CBA Is ................................................................................. 3
2.1.2. Comparison of Financial Analysis with Economic Analysis.................... 4
2.1.3. Overview of Performance Indicators ................................................ 5
2.2. Fundamental CBA Concepts and Methods .............................................. 6
2.2.1. Cash Flow Analysis ........................................................................ 6
2.2.2. Time Value of Money and Discounting .............................................. 7
2.2.3. Incremental Analysis (With-Without Comparison) .............................. 8
2.3. Performance Indicators and Decision Criteria .......................................... 9
2.3.1. Net Present Value (NPV) ................................................................ 9
2.3.2. Benefit-Cost Ratio (BCR) .............................................................. 10
2.3.3. Internal Rate of Return (IRR) ........................................................ 11
2.3.4. Investment Decision Under Budget Constraints [Optional] ................ 13

3. Chapter III: Step-by-Step Procedures of CBA for Public Investment

Projects ..................................................................................................... 17
3.1. Conducting CBA Using Excel Spreadsheets ........................................... 17
3.2. Standard CBA Procedures and the Structure of the Excel CBA Models ...... 17
3.2.1. Steps of CBA............................................................................... 17
3.2.2. Excel CBA Models ........................................................................ 18
3.3. Step I: Setting Model Parameters and Project Assumptions/Variables ...... 19
3.3.1. Model Parameters ....................................................................... 19
3.3.2. Project Assumptions/Variables ...................................................... 22
3.4. Step II: Identifying and Quantifying Financial Costs............................... 25
3.4.1. Identification of Financial Costs ..................................................... 25
3.4.2. Total Initial Investment Costs ....................................................... 25
3.4.3. Salvage Value ............................................................................. 27

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 3.4.4. Operating Costs .......................................................................... 28
3.5. Step III: Identifying and Quantifying Financial Benefits .......................... 30
3.5.1. Identification of Financial Benefits.................................................. 30
3.5.2. Revenues ................................................................................... 30
3.6. Step IV: Constructing Financial Cash Flow Tables and Estimating Financial
Indicators .................................................................................................. 31
3.6.1. Constructing Cash Flow Tables of Financial Costs and Benefits .......... 31
3.6.2. Estimating and Interpreting FNPV, FBCR, and FIRR ......................... 32
3.7. Step V: Identifying and Quantifying Economic Costs .............................. 35
3.7.1. Identification of Economic Costs .................................................... 35
3.7.2. Tangible Expenditures .................................................................. 35
3.7.3. Indirect Costs ............................................................................. 37
3.8. Step VI: Identifying and Quantifying Economic Benefits ......................... 38
3.8.1. Identification of Economic Benefits ................................................ 38
3.8.2. Incremental Outputs (Benefits) ..................................................... 39
3.8.3. Non-Incremental Outputs (Benefits) .............................................. 41
3.8.4. Revenue..................................................................................... 42
3.8.5. Indirect Benefits .......................................................................... 43
3.9. Step VII: Constructing Economic Cash Flow Tables and Estimating Economic
Indicators .................................................................................................. 47
3.9.1. Constructing Cash Flow Tables of Economic Costs and Benefits ......... 47
3.9.2. Estimating and Interpreting ENPV, EBCR, and EIRR ......................... 47
3.10. Step VIII: Testing the Sensitivity of the Results to Parameters and Variables
50
3.10.1. Conducting Sensitivity Analysis ..................................................... 50
3.11. Step IX: Summarizing the Results of Financial and Economic Analysis ..... 51
3.11.1. Reporting Financial and Economic NPV, BCR, and IRR ...................... 51

Reference .................................................................................................. 53

Annexures
Annexure 1. Description of Power Distribution Project .................................. 57
Annexure 2. Description of Power Transmission Project ................................ 61
Annexure 3. Description of Rural Infrastructure Development Project ............. 65

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 List of Figures

Figure 1. Flow Chart for Public Investment Decision ........................................... 4

Figure 2. Compounding and Discounting .......................................................... 7
Figure 3. With-Without Comparison and Before-After Comparison ........................ 8
Figure 4. Incremental Analysis for a Rehabilitation Project .................................. 9
Figure 5. IRR Process of Finding the Discount Rate at which NPV = 0 ................. 12
Figure 6. Model Parameters [Distribution & Transmission] ................................. 21
Figure 7. Project Assumptions/Variables [Distribution] ..................................... 23
Figure 8. Project Assumptions/Variables [Transmission] ................................... 23
Figure 9. Project Assumptions/Variables [Rural Infrastructure] .......................... 24
Figure 10. Total Initial Investment Costs (1)
[Distribution, Transmission & Rural Infra] ........................................ 26
Figure 11. Detailed Estimated Cost Format [Distribution] .................................. 26
Figure 12. Total Initial Investment Costs (2) [Distribution] ................................ 27
Figure 13. Total Initial Investment Costs (3) [Distribution] ................................ 27
Figure 14. Salvage Value [Distribution] .......................................................... 28
Figure 15. Operating Costs (1) [Distribution] .................................................. 29
Figure 16. Operating Costs (2) [Distribution] .................................................. 29
Figure 17. Annual Revenues (1) [Distribution] ................................................. 30
Figure 18. Annual Revenues (2) [Distribution] ................................................. 31
Figure 19. Cash Flows of Financial Costs and Benefits (1)
---- Horizontal format [Distribution] ............................................... 33
Figure 20. Cash Flows of Financial Costs and Benefits (2)
---- Vertical format [Distribution] ................................................... 34
Figure 21. Conversion of Financial Costs into Economic Costs [Distribution] ......... 36
Figure 22. A Simplified Example: Conversion Factor and Shadow Price Factor ...... 37
Figure 23. Indirect Costs [Rural Infrastructure] ............................................... 38
Figure 24. Increases in Consumerʼs Surplus and Providerʼs Surplus .................... 39
Figure 25. Consumerʼs Surplus and Providerʼs Surplus ...................................... 40
Figure 26. Incremental Outputs (1) [Distribution] ............................................ 40
Figure 27. Incremental Outputs (2) [Transmission] .......................................... 41
Figure 28. Non-Incremental Outputs (1) [Distribution] ..................................... 42
Figure 29. Non-Incremental Outputs (2) [Transmission] ................................... 42
Figure 30. Revenue (1) [Distribution]............................................................. 43
Figure 31. Revenue (2) [Transmission]........................................................... 43
Figure 32. Indirect Benefits [Rural Infrastructure] ............................................ 45

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Figure 33. Cash Flows of Economic Costs and Benefits (1) [Rural Infrastructure].. 48
Figure 34. Cash Flows of Economic Costs and Benefits (2) [Rural Infrastructure].. 49
Figure 35. Sensitivity Analysis (1) [Distribution] .............................................. 50
Figure 36. Sensitivity Analysis (2) ................................................................. 50
Figure 37. Sensitivity Analysis (3) [Distribution] .............................................. 51
Figure 38. Summary of the Results [Distribution] ............................................ 51
Figure 39. Summary of the Results [Transmission] .......................................... 51
Figure 40. Summary of the Results [Rural Infrastructure] ................................. 52

List of Tables

Table 1. Differences between Financial Analysis and Economic Analysis ................. 5

Table 2. Present Values of $100 from Different Years ......................................... 8
Table 3. NPVs of Cash Flow at Different Discount Rates .................................... 10
Table 4. BCR Compared to NPV ..................................................................... 11
Table 5. IRR and NPVs of Cash Flow at Different Discount Rates ........................ 12
Table 6. IRR Compared to NPV and BCR ......................................................... 13
Table 7. IRR vs. NPV and BCR Decisions When Considering Alternatives .............. 13
Table 8. Hypothetical Case of Selecting Alternatives under Budget Constraint ...... 14
Table 9. Selecting Projects by NPV ................................................................. 14
Table 10. Selecting Projects by BCR ............................................................... 15
Table 11. Structure of Excel CBA Models ......................................................... 18
Table 12. European Commissionʼs Reference Project Life Periods by Sector .......... 22

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 List of Abbreviation and Acronyms

BCR Benefit-Cost Ratio

CBA Cost-benefit Analysis
CD Custom Duty
CIF Cost, Insurance and Freight
CF Cash Flow
DF Discount Factor
DPP Development Project Proforma/Proposal
ENPV Economic Net Present Value
EIRR Economic Internal Rate of Return
EBCR Economic Benefit Cost Ratio
FNPV Financial Net Present Value
FBCR Financial Benefit-Cost Ratio
FIRR Financial Internal Rate of Return
GED General Economics Division
GCM Growth Center Market
IRR Internal Rate of Return
KWh Kilowatt-hour
MSME Micro, Small, Medium Enterprises
MVA Mega-Volt Ampere
MWA Megawatt Ampere
NPV Net Present Value
O&M Operation and Maintenance
PV Present Value
PPP Purchasing Power Parity
SD Supplementary Duty
WTP Willingness to Pay
WACC Weighted Average Cost of Capital
SDR Social Discount Rate
SER Shadow Exchange Rate
SERF Shadow Exchange Rate factor
SWRF Shadow Wage Rate Factor

ix
x
 Chapter I
Introduction
1. Chapter I: Introduction
1.1. Background
Public investment is carried out through public sector development projects and
programmes. Development projects and programmes should be formulated to align with
the existing national and sector Development Plan, e.g. Delta Plan, Perspective Plan, Five
Year Plan, and relevant Master Plans. After approval of a development project, the
development budget/public investment for the approved project is allocated through the
Annual Development Programme (ADP) for project implementation.
Development Projects and programs must be formulated, appraised and approved
by following the Planning Divisionʼs Circular “Instructions on Development Project
Formulation, Processing, Approval and Revision” (Memo no: 20.00.0000.404.014.61.
2020 (Part- 1)/133, Date: 12 June 2022).
The development projects are proposed in a format called ʻDevelopment Project
Proforma (DPP), stipulated in the said Circular. One of the Items in DPP is “financial and
economic analysis” (item 18).
Clause 1.1.8.2(CHHA) of the said Circular emphasizes the importance of conducting
financial and economic analysis for each project, when the Agency, Ministry/Division, and
Planning Commission formulate and appraise the project.
The development project is approved by either the Executive Committee of the
National Economic Council (ECNEC) or Minister/State-minister for Planning. The results
of financial and economic analysis are presented and used as one of the factors for making
decisions at the meeting for project approval.

1.2. Objective of the Handbook

The objective of this Handbook is to help its users to develop a hands-on
understanding of how to conduct a cost-benefit analysis (CBA) of a public investment
project, using an Excel spreadsheet model. The focus of the Handbook is on the ex-ante
assessment and appraisal of the performance of public investment projects in the context
of Bangladesh, and its target users are Desk Officers working in Agencies, Ministries/
Divisions, and Sector Divisions of the Planning Commission. By applying the methods and
procedures explained in the Handbook to the assessment and appraisal of public
investment projects, the users of the Handbook are expected to be able to assess and
appraise a proposed projectʼs financial and economic costs & benefits and their impacts
on the economic welfare of the society.
The remainder of the Handbook is structured as follows: Chapter I briefly explains
objectives of the Handbook. Chapter II explains and reviews the key concepts, definitions,
and methodology related to CBA. Chapter III demonstrates how to apply CBA techniques

1
to sample cases of power distribution, power transmission, and rural infrastructure
development projects, using the Excel examples that accompany this Handbook.1

1
These Excel CBA models are available upon request from the SPIMS Project/ PIM Reform Wing of
Programming Division for the Desk Officers engaged in the formulation, assessment, or appraisal of
DPPs. Or See the Planning Commission web site: https://plancomm.gov.bd/.

2
 Chapter II
Concepts, Methods, and Definitions
2. Chapter II: Concepts, Methods, and Definitions
2.1. Role of Cost-Benefit Analysis in the Assessment/Appraisal of Public
Investment Projects

2.1.1. What CBA Is

Cost-benefit analysis (CBA) is a systematic way of measuring and comparing the
total costs to the total benefits expected from undertaking a project. The purpose of
conducting CBA in the assessment and appraisal of a public investment project, in
particular, is to measure and compare the total costs to the total benefits and thereby to
ensure that scarce resources are allocated efficiently, and the proposed investment are
likely to contribute to the welfare of the society as a whole.
The standard CBA of a public investment project consists of the following three main
stages:

1. Financial analysis
2. Economic analysis
3. Sensitivity analysis

Through financial and economic analyses, as well as sensitivity analysis, CBA helps
decision-makers to identify an economically viable project and also to select project with
higher economic efficiency. For a project to be economically viable, it needs to meet the
following requirements:

1. It generates an economic surplus above its opportunity cost (i.e., positive net
economic benefits).
2. It is more efficient than alternatives to achieve the intended project outcomes
(i.e., least-cost or most efficient option).
3. It will have (but not necessarily generate by itself) sufficient funds and the
necessary institutional structure for successful operation and maintenance (i.e.,
financial sustainability in a broader sense).

CBA helps decision-makers to decide on public-sector involvements. Government

should only invest in projects which are economically beneficial to the society. Even if a
project is not financially profitable but economically beneficial, the government, given the
availability of resources and economic efficiency of the project, may decide to invest in it.
If a project is a revenue-generating one and there are potential private-sector entities
who could implement it, the government must demonstrate not only that the society will
be better off with the project but also that the project is not financially sustainable without
public-sector involvement (see Figure 1).

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 In short, if the financial analysis shows that the project is profitable for private-sector
entities, public-sector involvement is not justified unless the law and regulations prohibit
private entry to the market. This first condition is tested with the assessment of the
financial performance indicators, such as FNPV (financial net present value) and FIRR
(financial internal rate of return). In case the project is in need of public funds, only if the
economic analysis shows that the society will be better off with the project, the
governmentʼs contribution to the project is justified. This second condition is tested with
the assessment of the economic performance indicators, such as ENPV (economic net
present value) and EIRR (economic internal rate of return). If the project is not a revenue-
generating project, the test for the first condition through financial analysis can be
skipped.

Figure 1. Flow Chart for Public Investment Decision

2.1.2. Comparison of Financial Analysis with Economic Analysis

As mentioned earlier, the standard CBA of a public investment project entails both
financial and economic analyses. The key question for financial analysis is whether a
project is profitable for the project implementing entity, whereas that for economic
analysis is whether a project sufficiently contributes to the welfare of the entire society
(see Table 1 that summarizes the differences between financial analysis and economic
analysis).

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 Table 1. Differences between Financial Analysis and Economic Analysis
Financial Analysis Economic Analysis
Perspective Project implementing entity/ Economy-wide/society as a
investor whole
Objective To measure the profitability To measure the impact of the
of the project (financial project on the economic
sustainability) welfare of the society
(economic viability)
Costs Expenditures Welfare losses, opportunity
costs
Benefits Revenues Welfare gains (values
generated, satisfaction of the
members of the society),
resource cost savings
Market assumptions Existing markets with price Ideal “perfectly competitive,
distortions efficient” market
Prices Financial or market prices Economic or shadow prices
that are actually paid or that removed the effects of
received by the project market distortions from the
implementing entity financial prices
(price=marginal benefit)
Transfers Included Excluded
Externalities Excluded Included
Discount rate Financial discount Economic (Social) discount
rate/market borrowing rate rate (reflecting the social
(e.g., weighted average cost view on how future costs and
of capital: WACC) benefits should be valued
against present ones)
Performance indicators FNPV, FBCR, FIRR ENPV, EBCR, EIRR

2.1.3. Overview of Performance Indicators

As shown in Figure 1, CBA provides an objective framework for investment decision-
making based on the assessment of performance indicators. Both financial analysis and
economic analysis generate the following three key performance indicators from the cash
flows of project costs and benefits for investment decision:

1. Net present value (NPV)

2. Benefit-cost ratio (BCR)
3. Internal rate of return (IRR)

5
 Whereas financial analysis calculates financial net present value (FNPV) and financial
benefit-cost ratio (FBCR) based on the cash flows of financial costs and benefits
discounted at the financial discount rate, economic analysis calculates economic net
present value (ENPV) and economic benefit-cost ratio (EBCR) based on the cash flows of
economic costs and benefits (expressed in monetary terms) discounted at the economic
discount rate. Similarly, financial internal rate of return (FIRR) is calculated based on the
cash flows of financial costs and benefits and is compared to the financial discount rate,
whereas economic internal rate of return (EIRR) is calculated based on the cash flows of
economic costs and benefits and is compared to the economic (or social) discount rate.
In the next sections, the fundamental concepts and methods used in both financial
and economic analysis (i.e., cash flow analysis, time value of money and discounting, and
incremental analysis) are explained, followed by the presentation of the definitions of NPV,
BCR, and IRR to demonstrate how the values of those indicators should be interpreted
for public investment decision.

2.2. Fundamental CBA Concepts and Methods

2.2.1. Cash Flow Analysis
CBA measures and compares the total costs to the total benefits of the project using
the framework of cash flow analysis.
Cash flow refers to measuring total earnings/revenues (cash flows in) and
expenditures (cash flows out) of an agency in regard to a specific project in a specific
period of time (projectʼs lifetime). Net cash flow is the difference between the total
revenues and total costs/expenditures of a project for every year during the projectʼs
lifetime.
In the financial analysis of a project, the cash outflow (i.e., expenditures) that the
project is likely to incur is subtracted from the cash inflow (i.e., revenues) that the project
is likely to generate for every year during the project life to get the net cash flow.
The economic analysis of the project is also based on the same framework. In the
economic analysis of the project, the cash outflow of the economic costs (i.e., financial
costs + societal losses expressed in monetary value - transfers) that the project is likely
to incur is subtracted from the economic benefits (revenues (if any) + societal benefits
expressed in monetary value + cost savings) that the project is likely to generate for
every year during the projectʼs lifetime to get the net cash flow.
Because CBA bases its analysis on cash flows, some important accounting concepts
and items that do not entail cash outlays, such as depreciation, are excluded from
financial and economic cash flows used to calculate NPV, BCR, and IRR.

6
2.2.2. Time Value of Money and Discounting
Time value of money refers to the concept that money received today is more
valuable than money received in the future. For example, $100 received today can be
spent immediately to buy some goods and services. Or, if deposited in a bank account
that earns an annual interest rate of 12%, $100 deposited today will be about $176.2 in
five years through compounding (=100×1.125). But $100 received five years from today
apparently cannot be spent until then, and its value is far less than $176.2 (see Figure
2).

Figure 2. Compounding and Discounting

The concept of time value of money is essential in CBA because CBA compares the
cash flows of costs and benefits occurring in different years. The technique used to
convert a stream of future costs and benefits into a present value is called discounting.
Discounting is the reverse procedure of compounding. Therefore, if the annual interest
rate is 12%, $176.2 received five years from now is worth $100 (=176.2÷1.125) today.
It also means that $100 received five years from now is worth only $56.7 (=100÷1.125)
today.
Future streams of money in later years are more heavily discounted than those in
earlier years. Thus, as Table 2 indicates, the present value of $100 received 10 years
from today is only $32.2 (with a discount rate of 12%), whereas the present value of
$100 received 5 years from today is $56.7. Moreover, the present value is strongly
influenced by the discount rate. If the discount rate applied decreases from 12% to 8%,
for example, the present value of $100 received 10 years from today increases 43.8%
from $32.2 to $46.3. On the contrary, if the discount rate applied increases, the present
value of future streams of money decreases.

7
 Table 2. Present Values of $100 from Different Years
Discount Year
Rate 1 2 3 4 5 6 7 8 9 10
8% 92.6 85.7 79.4 73.5 68.1 63.0 58.3 54.0 50.0 46.3
10% 90.9 82.6 75.1 68.3 62.1 56.4 51.3 46.7 42.4 38.6
12% 89.3 79.7 71.2 63.6 56.7 50.7 45.2 40.4 36.1 32.2
14% 87.7 76.9 67.5 59.2 51.9 45.6 40.0 35.1 30.8 27.0
Chapter III shows how to apply the discounting technique to calculate the present
value of a future stream of costs and benefits more in detail.

2.2.3. Incremental Analysis (With-Without Comparison)

CBA requires that the costs and benefits of the project are defined as incremental
compared to the without-project scenario. This is not the same as the before-after
comparison, which assumes status quo without the project and may erroneously estimate
the net benefits of the project. The with-without comparison attempts to compare the
incremental costs and benefits arising from the project with what would happen in the
absence of the project (see Figure 3).
For example, assume that we are estimating the net benefits of a new transmission
project and that the annual total electricity supplied is expected to increase from 100,000
million kWh to 200,000 million kWh after the completion of the project. Additionally, an
on-going distribution project, which is about to be operational next year, is expected to
increase the supply of electricity in the same area to 120,000 million kWh (but the
transmission projectʼs increased electricity supply will remain 200,000 million kWh
annually). Then, the baseline value in the absence of the project must be 120,000 million
kWh, not 100,000 million kWh, and failing to account for the change that would occur
without the project would overestimate the incremental annual benefits by 25%
(=((200,000–100,000)/ (200,000–120,000)–1)×100) in this hypothetical example.

Figure 3. With-Without Comparison and Before-After Comparison

8
 In the case of a rehabilitation project, the expected benefits decrease over time
without the project. Thus, the estimated size of the incremental net benefits of the project
depends crucially on how accurately the counterfactual of what would happen in the
absence of the project can be estimated (see Figure 4).

Figure 4. Incremental Analysis for a Rehabilitation Project

2.3. Performance Indicators and Decision Criteria

As discussed above, the commonly used indicators to determine financial
sustainability and economic viability are net present value (NPV), benefit-cost ratio (BCR),
and internal rate of return (IRR).

2.3.1. Net Present Value (NPV)

Net present value (NPV) is the difference between the sum of the present value of
cash inflows and the sum of the present value of cash outflows over a project life. It
represents the present amount of the expected net benefits (i.e., benefits minus costs)
generated by the project.

�
(𝐶𝐹 of Benefits)� − (𝐶𝐹 of Costs)�
𝐍𝐏𝐕 = 𝑃𝑉 of Benefits − 𝑃𝑉 of Costs = �
(1 + 𝑖)�
���

where PV = present value; CF = cash flow of a period; i = discount rate; N = total

number of periods; t = time of the cash flow

The balance of costs and benefits in the early years of a project during the
construction period is always negative, and it becomes positive only some years later
once the project has become operational. Because future streams of net benefits in later
years are more heavily discounted than those in earlier years, the determination of the

9
net present value of a project is strongly influenced by the discount rate. Table 3 shows
the NPVs of a hypothetical cash flow at different discount rates. As expected, the NPV
decreases as the discount rate increases, whereas it increases as the discount rate
decreases.

Table 3. NPVs of Cash Flow at Different Discount Rates

Year
Discount
1 2 3 4 5 6 7 8 9 10 NPV
Rate
-30.0 -70.0 15.0 20.0 25.0 25.0 25.0 25.0 25.0 25.0
8% -27.8 -60.0 11.9 14.7 17.0 15.8 14.6 13.5 12.5 11.6 $23.8
10% -27.3 -57.9 11.3 13.7 15.5 14.1 12.8 11.7 10.6 9.6 $14.2
12% -26.8 -55.8 10.7 12.7 14.2 12.7 11.3 10.1 9.0 8.0 $6.1
14% -26.3 -53.9 10.1 11.8 13.0 11.4 10.0 8.8 7.7 6.7 -$0.7
16% -25.9 -52.0 9.6 11.0 11.9 10.3 8.8 7.6 6.6 5.7 -$6.4

Decision rule: The NPV is a simple and precise performance indicator. A positive NPV
means that the project generates a net benefit and is desirable either in financial or
economic terms.

 NPV > 0 → Financially profitable/Economically viable

 NPV = 0 → Neither
 NPV < 0 → Not financially profitable/Not economically viable

When choosing only one project among different options, the ranking of the net
present values of all alternatives indicates the best one. The expected NPV of the selected
project must be at least as high as the NPV of the second-best alternative.

2.3.2. Benefit-Cost Ratio (BCR)

Benefit-cost ratio (BCR) is the ratio of the sum of the present value of cash inflows
to the sum of the present value of cash outflows over the project life. It is the present
value of project benefits divided by the present value of project costs.

(𝐶𝐹 ofBenefits)�
∑�
𝑃𝑉 of Benefts ��� (1 + 𝑖)�
𝐁𝐂𝐑 = =
𝑃𝑉 of Costs (𝐶𝐹 ofCosts)�
∑���� (1 + 𝑖)�

where PV = present value; CF = cash flow of a period; i = discount rate; N = total

number of periods; t = time of the cash flow

Decision rule: If the BCR is greater than or equal to one, the project is desirable
either in financial or economic terms, because the present value of the benefits is greater
than the present value of the costs or equal.

10
  BCR > 1 → Financially profitable/Economically viable
 BCR = 1 → Neither
 BCR < 1 → Not financially profitable/Not economically viable

When the NPV calculated applying the same discount rate is positive, the BCR always
becomes greater than one. However, unlike the NPV, the BCR, as a ratio, is independent
of the size of the investment, and it does not consider the total amount of net benefits,
as illustrated in Table 4.

Table 4. BCR Compared to NPV

Discount Rate: 12%
Year Indicator
Project
1 2 3 4 5 6 7 8 9 10 NPV BCR
X -30 -70 15 20 25 25 25 25 25 25 $6.1 1.07
Y -300 -700 150 200 250 250 250 250 250 250 $61.2 1.07

The BCR can be used to assess the projectʼs efficiency, and the most appropriate
case for using the BCR is under capital budget constraints. (Investment decision under
budget constraints will be considered below.)

2.3.3. Internal Rate of Return (IRR)

Internal rate of return (IRR) is a discount rate that makes the NPV of all cash flows
equal to zero. Using the following NPV formula, set NPV equal to zero, and solve for the
discount rate to get the IRR.
�
(𝐶𝐹 of Benefits)� − (𝐶𝐹 of Costs)�
𝑁𝑃𝑉 = � =0
(1 + 𝐈𝐑𝐑)�
���

where NPV = net present value; CF = cash flow of a period; N = total number of
periods; t = time of the cash flow

Using the same hypothetical data presented in Table 3, Figure 5 illustrates that the
IRR calculation is just a process of trying to find the discount rate that makes the area
below zero (i.e., net present value of projects costs) equal to the area above zero (i.e.,
net present values of project benefits).
Note that the IRR does not exist for the projects whose streams of net benefits are
negative even before discounting. Or, more than one IRR may exist for the projects whose
stream patterns of net benefits oscillate over time.

11
 Figure 5. IRR Process of Finding the Discount Rate at which NPV = 0

Table 5 reresents the hypothetical cash flow data of Table 3, on which Figure 5 is
based, along with the present values of costs and benefits discounted at different discount
rates. It shows that the NPV becomes zero when the discount rate applied is 13.8%.

Table 5. IRR and NPVs of Cash Flow at Different Discount Rates

Year
Discount
1 2 3 4 5 6 7 8 9 10 NPV
Rate
-30.0 -70.0 15.0 20.0 25.0 25.0 25.0 25.0 25.0 25.0
8% -27.8 -60.0 11.9 14.7 17.0 15.8 14.6 13.5 12.5 11.6 $23.8
10% -27.3 -57.9 11.3 13.7 15.5 14.1 12.8 11.7 10.6 9.6 $14.2
12% -26.8 -55.8 10.7 12.7 14.2 12.7 11.3 10.1 9.0 8.0 $6.1
13.8% -26.4 -54.1 10.2 11.9 13.1 11.5 10.1 8.9 7.8 6.9 $0.0
14% -26.3 -53.9 10.1 11.8 13.0 11.4 10.0 8.8 7.7 6.7 -$0.7
16% -25.9 -52.0 9.6 11.0 11.9 10.3 8.8 7.6 6.6 5.7 -$6.4

Unlike the NPV and the BCR, the IRR does not incorporate the discount rate into its
formula. Thus, the IRR can be calculated without assuming any discount rate. On the
other hand, by the IRR alone, it cannot be decided whether a project is financially
profitable or economically viable. The results of the IRR values should be interpreted in
conjunction with the minimum required discount rate, which is, in the context of
Bangladesh, the financial discount rate of 12% for financial analysis, or the social discount
rate of 12% for economic analysis.

Decision rule: If the IRR equals or exceeds the discount rate, i, then the project
generates a net benefit and is desirable either in financial or economic terms.

 IRR > i → Financially profitable/Economically viable

12
  IRR = i → Neither
 IRR < i → Not financially profitable/Not economically viable

Similar to the BCR, the IRR does not reflect the size of net benefits, as illustrated in
Table 6.
Table 6. IRR Compared to NPV and BCR
Discount Rate: 12%
Year Indicator
Project
1 2 3 4 5 6 7 8 9 10 NPV BCR IRR
X -30 -70 15 20 25 25 25 25 25 25 $6.1 1.07 13.8%
Y -300 -700 150 200 250 250 250 250 250 250 $61.2 1.07 13.8%

When considering a single project, the IRR leads to the same conclusion as the NPV
and BCR. A project in which an IRR is greater than the discount rate, i, the NPV is always
greater than zero (at the discount rate, i), and the BCR is always greater than one (at
the discount rate, i).
When considering alternatives, however, the IRR may come to different conclusions
from the NPV and the BCR. Table 7 shows that if the discount rate applied is 12%, the
IRR, like the NPV and BCR, selects Project Y over Project X. On the contrary, if the
discount rate applied changes to 8%, the NPV and BCR prefer Project X to Project Y but
the IRR still selects Project Y.

Table 7. IRR vs. NPV and BCR Decisions When Considering Alternatives
Discount Rate: 12%
Year Indicator
Project
1 2 3 4 5 6 7 8 9 10 NPV BCR IRR
X -30 -70 15 15 20 20 30 50 50 70 $33.4 1.40 19.4%
Y -30 -70 50 50 30 20 20 20 15 15 $39.3 1.48 27.2%
Discount Rate: 8%
Year Indicator
Project
1 2 3 4 5 6 7 8 9 10 NPV BCR IRR
X -30 -70 15 15 20 20 30 50 50 70 $63.3 1.72 19.4%
Y -30 -70 50 50 30 20 20 20 15 15 $58.6 1.67 27.2%

When the IRR and the NPV lead to different conclusions, the NPV decision rule usually
should be followed, as it maximizes the values generated by the project; that is, profits
in the case of financial analysis or the welfare of the society in the case of economic
analysis.

2.3.4. Investment Decision Under Budget Constraints [Optional]

If there are no budget constraints, all projects that have positive NPVs should be
implemented. On the other hand, if there are budget constraints, projects must be
prioritized for investment decisions. As mentioned above, when considering alternatives

13
under budget constraints, the BCR, rather than the NPV, should be used as the primary
decision criterion.

Example: Assume that there are five proposed investment projects. Each projectʼs total
capital investment amount and estimated NPV and BCR are as shown in Table 8. If the
investment budget available is $5,000 in total, which of the following proposed projects
should be implemented?

Table 8. Hypothetical Case of Selecting Alternatives under Budget Constraint

Budget: $5,000
Project Investment NPV BCR
A $5,000 $1,000 1.20
B $1,000 $400 1.40
C $500 $250 1.50
D $1,500 $500 1.33
E $2,000 $460 1.23

Table 9 shows the ranking of the projects by NPV. It is a mistake to prioritize the
proposed projects by the size of the NPV until reaching the budget limit. When the NPV
decision rule is followed, for example, Project A with the highest NPV of $1,000 is selected
first. Because implementing Project A requires $5,000 investment and the budget
available is also $5,000, Project A is the only project to be implemented. As a result, the
NPV generated becomes $1,000.

Table 9. Selecting Projects by NPV

When there are budget constraints, the efficiency of the project must be considered
for maximizing the total NPV. Because the projectʼs efficiency is assessed by the BCR, the
proposed projects should be selected by the size of the BCR until reaching the budget
limit. Table 10 shows the ranking of the projects by BCR. When the BCR decision rule is
followed, Project C with the highest BCR of 1.50 is selected first. Because Project Cʼs NPV
is $250, the NPV generated is also $250. Because implementing Project C requires $500
investment and the budget available is $5,000, the remaining budget becomes $4,500.
Next, Project B with the second highest BCR of 1.40 is selected. Because Project B
generates a NPV of $400, while implementing it costs $1,000, the cumulative NPV

14
becomes $650 (=$250+$400) and the remaining budget becomes $3,500 (=$5,000-
$500-$1,000). This process continues until all the budget will be used with the additional
selections of Project D and Project E. In this way, the total NPV is maximized at $1,610,
which is 61% (=(1,610÷1,000-1)×100) higher than the NPV generated under the NPV
decision rule.

Table 10. Selecting Projects by BCR

Cumulative Cumulative
Project Investment NPV BCR
Investment NPV
C $500 $250 1.50 $500 $250
B $1,000 $400 1.40 $1,500 $650
D $1,500 $500 1.33 $3,000 $1,150
E $2,000 $460 1.23 $5,000 $1,610
A $5,000 $1,000 1.20 $10,000 --

Decision rules: When there are budget constraints, the efficiency of the project must
be considered.

 Proposed projects should be selected by the size of the BCR until reaching the
budget limit → Cumulative NPV is maximized

15
16
 Chapter III
Step-by-Step Procedures of CBA for Public Investment Projects
3. Chapter III: Step-by-Step Procedures of CBA for Public Investment Projects
3.1. Conducting CBA Using Excel Spreadsheets
Chapter III demonstrates how to apply CBA techniques to public investment projects.
The step-by-step examples of CBA procedures are presented using the following three
sample cases:

1. Power distribution project

2. Power transmission project
3. Rural infrastructure development project

These analytical samples in Excel have been developed by the SPIMS Project for use
in the formulation, assessment, and appraisal of public investment projects in
Bangladesh.2

3.2. Standard CBA Procedures and the Structure of the Excel CBA Models
3.2.1. Steps of CBA
As mentioned, the standard CBA of public investment projects consists of the three
main stages of (1) financial analysis, (2) economic analysis, and (3) sensitivity analysis,
which are closely related to each other. In both financial and economic analysis, there are
the following four steps:

1. Identification of project costs and benefits

2. Quantification/measurement of project costs and benefits
3. Construction of cash flow tables of costs and benefits
4. Estimation and interpretation of NPV, BCR, IRR

For a quick review, the major differences between financial and economic analysis
are summarized below (also see Table 1):

1. Financial costs and benefits are expenditures and revenues for the project
implementing entity, respectively, whereas economic costs and benefits are
welfare losses and gains for the society as a whole, which include externalities
but exclude transfer payments.
2. Costs and benefits are measured in market prices in financial analysis, whereas
these are measured in shadow prices in economic analysis. Financial costs and
benefits are adjusted into economic costs and benefits applying conversion

2
These Excel CBA models are available upon request from the SPIMS Project/ PIM reform wing of
Programming Division. Or see the Planning Commission web site: https://plancomm.gov.bd/.

17
 factors.
3. Cash flows of financial costs and benefits are discounted using the financial
discount rate to calculate FNPV and FBCR, whereas economic costs and benefits
are discounted using the social discount rate to estimate ENPV and EBCR.
Similarly, the FIRR is compared to the financial discount rate to interpret the
results, whereas the EIRR is compared to the social discount rate.

3.2.2. Excel CBA Models

In accordance with the standard CBA procedures, the Excel CBA models developed
by the SPIMS Project are composed of the following 13 worksheets:

Table 11. Structure of Excel CBA Models

Worksheet Name Description
0.Contents Table of contents
1.Params* Setting model parameters & project assumptions/variables
2a.FCosts* Identifying and quantifying financial costs (1)----DPP format
2b.FCosts* Identifying and quantifying financial costs (2)----General format
3.FBenefits* Identifying and quantifying financial benefits
4a.FAnalysis Constructing financial cash flow tables and estimating financial
indicators (1)----Horizontal format
4b.FAnalysis Constructing financial cash flow tables and estimating financial
indicators (2)----Vertical format
5.ECosts Identifying and quantifying economic costs
6.EBenefits Identifying and quantifying economic benefits
7a.EAnalysis Constructing economic cash flow tables and estimating
economic indicators (1)----Horizontal format
7b.EAnalysis Constructing economic cash flow tables and estimating
economic indicators (2)----Vertical format
8.Sensitivity Testing sensitivity of the results to parameters & assumptions
9.Results Summarizing the results of financial and economic analysis

Sheets 2a.FCosts through 4b.FAnalysis are for financial analysis, whereas sheets
5.ECosts through 7b.EAnalysis are for economic analysis. 1.Params and 8.Sensitivity are
actually in one sheet named 1.Params_8.Sensitivity (due to a functional reason). The
structure of the Excel models is broadly consistent with the steps described in the
Development Project Proforma/Proposal (DPP) Manual3 (although the DPP Manual does
not specifically refer to sensitivity analysis).
Note that once the Excel model is set up appropriately, what the user of the model
needs to do is to enter data in the first four Excel sheets (whose names are asterisked

3
General Economics Division of Planning Commission 2014

18
(*) in Table 11). All the remaining tasks will be basically taken care of by Excel.

3.3. Step I: Setting Model Parameters and Project Assumptions/Variables

From this section forward, how to conduct CBA will be explained step-by-step using
examples from the sample power distribution, power transmission, and rural
infrastructure development projects. Please keep in mind, while following explanations
and instructions, that our intermediate goal (before the final goal of estimating the values
of the performance indicators) is to construct cash flow tables of project costs and
benefits (such as Figures 19 and 33, respectively).

3.3.1. Model Parameters

As Table 11 suggests, the first step in conducing CBA using the Excel model is to set
values for model parameters and project assumptions. For this step, a statement of the
project, its design, and demand for project outputs must be carefully studied. (For a
description of each sample project, see Annexures 1-3.)
The common model parameters need to be set for the Excel CBA models are as
follows:

 Physical Contingency (%)

 Price Contingency (%)
 Conversion Factors
 Financial Discount Rate (%)
 Economic (Social) Discount Rate (%)
 Exchange Rate (USD/BDT)

Physical contingency is a cash reserve that represents the expected monetary value
of additional real resources that may be required beyond the base costs to complete the
project. The physical contingency should be treated as part of the project costs. The
physical contingency rate most commonly used in Bangladesh is 2.0%.
Price contingency is a cash reserve to meet a cost-overrun due to inflation. Unlike
physical contingency, price contingency is not counted as project costs in CBA. This is
because all project costs and benefits in the tables of financial and economic cash flows
(i.e., Figures 19 and 33, respectively) are measured in constant prices of the base year,
and thus the effect of inflation is eliminated. In the Excel model, the price contingency
rate is used to calculate the total initial investment costs that excludes the price
contingency. The Excel model can handle the price contingencies for both domestically
procured inputs and internationally procured inputs. In Bangladesh, however, no
distinction is usually made between domestically and internationally procured inputs in

19
DPPs.4
Conversion factor is the ratio between the financial (or market) value and economic
value of project inputs. It is used to transform financial costs into economic costs. In
theory, different conversion factors should be set for different types of project inputs5.
The Excel model can set two conversion factors; that is, the conversion factor for
traded goods6 and the wage conversion factor for unskilled labor (though only the
conversion factor for traded goods is used for all the three sample projects)7.
Discount rate is used to calculate the present values of future streams of costs and
benefits occurring over different years (see 2.2.2 Time Value of Money and Discounting
in Chapter I). Financial discount rate is a market borrowing rate (e.g., weighted average
cost of capital: WACC), whereas economic (or social) discount rate more broadly
reflects the social view on how future costs and benefits should be valued against present
ones. Currently in Bangladesh, the discount rate of 12.0% is used for both financial and
economic analysis. 8
Exchange rate is the ratio of the value of one currency to another. It is used to
convert foreign currency costs into local currency costs in the Excel model. However,

4
According to the Planning Divisionʼs circular*, the physical contingency can be proposed up to 2 % of
capital cost, and price contingency can be proposed up to 8% of total cost. *Planning Divisionʼs Circular
for Instructions on Development Project Formulation, Processing, Approval and Revision (Memo no:
20.00.0000.404.014.61.2020(Part- 1)/133, Date: June 12, 2022)
5
Conversion Factor is used to convert a “distorted price” into an “economic price”. There are three types
of conversion factor: a) to convert a “market price – distorted by taxes” into a “market prices”. In general
almost all of the goods and services in Bangladesh is affected by VAT and so one strategy is to use
1/(1+VAT%) as a strategy to convert general market prices into “economic price”., b) price affected by
special tax, subsidy or administrative decisions – such prices are converted using a ʻconversion factorʼ
which is listed in the “Handbook for Planning Commission 1987 and DPP manual 2014” for some selected
sectors like electricity, rice, etc., and c) prices affected by tax and subsidy at the time of export or import.
This conversion factor is known as ʻStandard Conversion Factorʼ which is given by the formula
(X+M)/(X+M+CD+SD-Xsubisdy) where X is export amount, M is import amount, amount of (CD is
custom duty, SD is supplementary or similar additional duty on imported goods and Xsubsidy is export
subsidy) collected on exports and imports.
6
If the project uses imported inputs (tradable goods, e.g., gas and oil), border prices are used as
economic cost, i.e., import cost plush insurance and freight (CIF). To simplify the case, this model uses
“conversion factor for traded goods” for all inputs except “unskilled workers”.
7
Feasibility study Template of Planning Divisionʼs circular* instructs “the value of cost and benefit
components into economic price should be converted by using Standard Conversion Factor (SCF)
determined by the Government or any standard method can be used for.” For Conversion Factors
determined by the Government, see Handbook for Planning Commission 1987 and DPP manual 2014.
*Planning Divisionʼs Circular for Instructions on Development Project Formulation, Processing, Approval
and Revision (Memo no: 20.00.0000.404.014.61.2020(Part- 1)/133, Date: June 12, 2022)
8
For public investment project, for both financial discount rate and economic discount rate, 12% should
be used, according to the Planning Division circular. [Memo no: 20.00.0000.404.014.027.18-177]

20
because all project costs are reported in terms of the local currency in the DPP, this
parameter is not used in the sample projects.

Figure 6 shows a set of model parameters entered in the 1.Params sheet.

Contingency
Physical Contingency (%) 2.0%
Price Contingency, Local currency (%) 5.0%
Price Contingency, Foreign currency (not used in this sample) (%) 5.0%

Conversion Factor
Conversion Factor for Traded Goods 1.15
Wage Conversion Factor for Unskilled Labor (not used in this sample) 1.45

Discount Rate
Financial Discount Rate (%) 12.0%
Economic (Social) Discount Rate (%) 12.0%

Exchange Rate (not used in this sample) (USD/BDT) 100

Figure 6. Model Parameters [Distribution & Transmission]

EXERCISE 1. Letʼs check the values of the model parameters entered into beige-colored
cells in the 1.Params sheet of the Excel model. (Remember that the entry of a value on
the parameter or assumption/variable should be done only once. The subsequent use of
the data should be made by referring to the cells in which the values were first entered.)

21
3.3.2. Project Assumptions/Variables
In addition to the model parameters, the Excel model requires project assumptions/
variables to be specified. For example, the following assumptions/variables need to be
set for all projects:

 Project Life (years)

 Construction Period (years)

The project life can be divided into (a) the construction (or investment) period
and (b) the operating life of the project. The project life may be determined by
considering the technical life of the major investment assets (e.g., machinery) and the
market life of the output (i.e., the period for which the benefits will satisfy a need), and
it can vary from one type of project to another. In Bangladesh, the project life of 30 years
is most commonly used for the CBA of power-sector and rural infrastructure development
projects. This is because after 30 years the initial investment cost of the project will be
marginal.
For reference, Table 12 presents the project life periods by sector recommended by
the European Commission.9

Table 12. European Commissionʼs Reference Project Life Periods by Sector

Sector Project Life (Years)
Railways 30
Roads 25-30
Ports and Airport 25
Urban Transport 25-30
Water Supply/Sanitation 30
Water Management 25-30
Buildings 20
Energy 15-25
Broadband 15-20
Business Infrastructure 10-15
Other Sectors 10-15

There are other project assumptions/variables that need to be specified to estimate

the financial and economic cash flows of costs and benefits. These are, for example, the
assumptions/variables related to the supply of and the demand for project outputs, the
prices of inputs and outputs, and the number of beneficiaries, etc.

9
Source: European Commission. 2014. Guide to Cost-Benefit Analysis of Investment Projects: Economic
Appraisal Tool for Cohesion Policy 2014-2020. Brussels.

22
 Figures 7-9 shows a set of project assumptions/variables for each of the sample
projects.
Project Life & Construction Period
Project Life (years) 30
Construction Period (years) 5
Demand
Growth in Capacity Utilization/Growth of Demand for Electricity (%) 9.0%
Existing Customers (#) 100,000
Capacity
Initial Capacity Utilization after Construction (%) 80.0%
Total Capacity to be Increased per hour (MVA/hour) 595
Total Capacity to be Increased per year (MVA/year) 5,212,200
System Loss (%) 5.25%
Additional Supply of Electricity to Meet Demand per year (MVA/year) 4,938,560
Price & Costs
Average Sales Rate per kWh (BDT/kWh) 8.05
Average Cost of Input (Purchase rate + Wheeling charge) per KWh (BDT/kWh) 6.75
Cost of Electricity Produced Privately per kWh (BDT/kWh) 12.00
Service Improvement
Reduction in Load Shedding per day (mins/day) 12
Reduction in Load Shedding per year (hrs/year) 73.0
Allocation Benefits among Generation/Transmission/Distribution
Percent of Indirect Benefits Attributable to the Project (#) 33.3%

Figure 7. Project Assumptions/Variables [Distribution]

Project Life & Construction Period

Project Life (years) 30
Construction Period (years) 6
Capacity
Incremental Load Flow/Total Capacity to be Increased (MW/hour) 1,398.63
Load Factor (%) 90.0%
Gross Annual Energy (considering the Load Factor) (mil.kWh/year) 11,026.80
Transmission Loss (%) 2.77%
Wheeled Energy/Additional Supply of Electricity to Meet Demand (mil.kWh/year) 10,721.36
Percent of Electricity Transmitted to Commercial Customers (%) 39.18%
Price & Costs
Wheeling Charge (BDT/kWh) 0.2791
Revenues from Wheeling Charge (lakh) 29,923.31
Average Sales Rate for Residential (BDT/kWh) 7.49
Average Sales Rate for Commercial (BDT/kWh) 9.80
Cost of Electricity Produced Privately for Residential (BDT/kWh) 12.00
Cost of Electricity Produced Privately for Commercial (BDT/kWh) 12.00
Service Improvement
Existing Total Customers (#) 1,332,805
Percent of Existing Total Customers who Benefit from Cost Savings (%) 1.0%
Avg. Cost Savings per Customer (BDT/year) 1,000
Allocation Benefits among Generation/Transmission/Distribution
Percent of Indirect Benefits Attributable to the Project (#) 33.3%

Figure 8. Project Assumptions/Variables [Transmission]

23
 Project Life & Construction Period
Project Life (years) 30
Construction Period (years) 5
Demand
Growth in Capacity Utilization/Growth of Demand (%) 0%
Capacity
Initial Capacity Utilization after Construction (%) 100%
Population & Households
Total Population (#) 35,000
Annual Population Growth Rate (%) 1.37%
Avg. Household Size (#/HH) 5.2
Total Households (#) 6,731
Percent of Agricultural Households in Total Households (%) 45.0%
Agricultural Households (#) 3,029
Percent of MSME Households in Total Households (%) 7.5%
MSME Households (#) 505
Percent of Students in Total Population (%) 20.0%
Students (#) 7,000
Student Dropout Rate (%) 10.0%
Reduction in Student Dropouts (%) 10.0%
Percent of Female Population (%) 50.0%
Percent of Females Aged 15 to 44 (%) 50.0%
Percent of Women Giving Birth per year (%) 8.0%
Maternal Mortality Rate (#/100,000 births) 173
Reduction in Maternal Deaths (%) 70.0%
Population in Negativey Affected Areas (#) 13,000
Annual Population Growth Rate in Negativey Affected Areas (%) 1.37%
Avg. Household Size for Negatively Affected Areas (#/HH) 5.2
Households in Negatively Affected Areas (#) 2,500
Income
Avg. Monthly Income for Agricultural Households (BDT/month) 12,000
Avg. Monthly Income for MSME Households (BDT/month) 25,000
Increase in Agricultural Income (%) 20.0%
Increase in MSME Income (%) 25.0%
Increase in Personal Income due to Avoidance of Dropout (USD/life) 209,000
Working Life of a Person (years) 35
Purchasing Power Parity (PPP) from USD to BDT (BDT/USD) 32.81
Increase in Personal Income due to Avoidance of Dropout (BDT/year) 195,923
Total Statistical Value of Life in Bangladesh (BDT/life) 1,909,355
Annual Statistical Value of Life in Bangladesh (BDT/year) 54,553
Avg. Monthly Income for Households in Negatively Affected Areas (BDT/month) 23,000
Loss of Income in Negatively Affected Areas (%) 4.0%
Depreciation (for the Calculation of Salvage Value)
Annual Depreciation Rate for Total Initital Investment (%) 10.0%

Figure 9. Project Assumptions/Variables [Rural Infrastructure]

EXERCISE 2. Letʼs check the values of the project assumptions/variables entered in the
1.Params sheet, by referring to the project descriptions in Annexures 1-3.

24
3.4. Step II: Identifying and Quantifying Financial Costs
Once the parameters and the assumptions/variables are set, we can start
preparing cash flow tables for financial analysis. Financial analysis focuses on the
ability of the project to generate sufficient incremental cash flows to cover its capital and
recurrent costs.

3.4.1. Identification of Financial Costs

The second step in conducting CBA using the Excel model is to identify financial costs
and quantify them.
Financial costs are project expenditures, and they can be classified into three
components:

 Initial investment costs

 Salvage (or residual) value of investment assets
 Operating costs

3.4.2. Total Initial Investment Costs

Initial investment costs include the capital costs of all the fixed assets (e.g., land,
buildings, machinery, equipment) and non-fixed assets (e.g., technical costs such as
design/planning, project management and technical assistance, construction
supervision) during construction. There are two ways to enter data and calculate total
initial investment costs using the Excel model. One way is to enter the estimated costs of
the following initial investment items directly into the 2b.FCosts sheet in the beige-colored
cells (see Table 10):

 Materials & equipment costs

 Labor costs
 Skilled workers
 Unskilled workers
 Land acquisition/compensation costs
 Consultant costs
 General/administrative costs (overhead costs)
 Taxes, subsidies (transfers)

25
 Local Currency (BDT) Foreign
Total
Item Project Own Currency
GOB (BDT)
Aid Funds (USD)
Materials & Equipment Costs 0 0 0 0 0
Labor Costs 0 0 0 0 0
Skilled Workers 0 0 0 0 0
Unskilled Workers 0 0 0 0 0
Land Acquisition/Compensation Costs 0 0 0 0 0
Consultant Costs 0 0 0 0 0
General/Administrative Costs (Overhead Costs) 0 0 0 0 0
Taxes, Subsidies (Transfers) 0 0 0 0 0
Base Costs (w/o Contingencies) 0 0 0 0 0
Physical Contingency (2%) 0 0 0 0 0
Price Contingency, Local currency (5%) / Foreign currency (5%) 0 0 0 0 0
Total Initial Investment Costs (w/ Contingencies) 0 0 0 0 0
Total Initial Investment Costs (BC + Physical Contingency) 0 0 0 0 0

Figure 10. Total Initial Investment Costs (1) [Distribution, Transmission & Rural Infra]

The other way, which has been employed by all the three sample cases, is to enter
cost data into the 2a.FCosts sheet, which is based on the Detailed Estimated Cost form
(Annexure V(a) of the DPP Manual) used in Bangladesh (see Figure 11).

Detailed Estimated Cost (Taka in Lac)

Total
Project Aid
Economic Economic Economic Sub-code Own % of Total
Unit Unit Cost Quantity GOB RPA DPA
Code Sub-code Description (In Detail) Fund Others Total Project
(FE) Through Special Through Through
(FE) Cost
GOB Account* PD DP
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)
(a) Revenue:
0.00 0%
0.00 0%
0.00 0%
Sub total of Revenue 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0%
(b) Capital:
0.00 0%
Taxes (Transfers) 0.00 0%
Subsidies, negative costs (Transfers) 0.00 0%
Sub total of Capital 43,349.99 0.00 0.00 0.00 119,567.45 59,376.36 0.00 222,293.80 93%
(c) Physical Contingency (2%) 867.00 0.00 0.00 0.00 2,391.35 1,187.53 0.00 4,445.88 2%
(d) Price Contingency (5%) 2,167.50 0.00 0.00 0.00 5,978.37 2,968.82 0.00 11,114.69 5%
Total (a+b+c+d) 46,384.49 0.00 0.00 0.00 127,937.17 63,532.71 0.00 237,854.37 100%

Figure 11. Detailed Estimated Cost Format [Distribution]

The cost data entered in the 2a.FCosts sheet will be taken over by the 2b.FCosts
sheet. Figure 12 shows the calculation of total initial investment costs for the sample
power distribution project. The sum of total initial investment costs entered through the
Detailed Cost Estimate format is BDT 237,854 lakh, of which BDT 4,446 lakh is physical
contingency and BDT 11,115 lakh is price contingency. Because the effect of inflation
should not be considered, the price contingency is excluded from the total initial
investment costs. As a result, the final total initial investment costs become BDT 226,740
lakh (=237,854-11,115), including rounding errors.

26
 Data either from above Table or Detailed Estimated Cost (2a.FCosts)* GOB PA OF FC Total
Taxes, Subsidies (Transfers) 0 0 0 0 0
Base Costs (w/o Contingencies) 43,350 119,567 59,376 0 222,294
Physical Contingency 867 2,391 1,188 0 4,446
Price Contingency 2,167 5,978 2,969 0 11,115
Total Initial Investment Costs (w/ Contingencies) 46,384 127,937 63,533 0 237,854
Total Initial Investment Costs (BC + Physical Contingency) 44,217 121,959 60,564 0 226,740

Figure 12. Total Initial Investment Costs (2) [Distribution]

EXERCISE 3. Letʼs check how the Excel calculates the total initial investment costs during
construction using the 2a.FCosts sheet and the 2b.FCosts sheet.

Next, the total initial investment costs must be distributed across the construction
years in which they actually arise. Because the construction period of the power
distribution project is five years, we need to specify how much investment will be made
in each of these five years (see the project description in Annexure 1). Remember that
the sum of each allocation must add up to the total initial investment costs minus the
price contingency (i.e., BDT 226,740 lakh), as shown in Figure 13.

Item 1 2 3 4 5 Total
Annual Initial Investment Breakdowns during Construction (%) 0.5% 35.6% 39.5% 23.7% 0.6% 100%
Annual Initial Investment Costs (BDT) 1,230 80,626 89,656 53,815 1,413 226,740

Figure 13. Total Initial Investment Costs (3) [Distribution]

EXERCISE 4. Letʼs check how the Excel allocates the total initial investment costs across
the construction years.

3.4.3. Salvage Value

Salvage (or residual) value is the remaining value of investment assets at the end
of the project life, which is treated as a negative investment cost. Figure 14 shows the
estimation of salvage value for the sample power distribution project. It is assumed that
among the initial investments of BDT 4,700 lakh (made for the overhead and
underground line construction), 10% of them can be salvaged at the end of the project.
The salvage value of investment is thus BDT 470 lakh.
If there is land acquisition, it must be taken into consideration that land may
appreciate rather than depreciate as land has no definitive useful life.
In the model of this handbook, the salvage (or residual) value is included to show the
calculation of the salvage (or residual) value. However, in many cases, where the project
life is more than 30 years, and so, the salvage (or residual) value is very marginal, it
often happens that the calculation of the salvage (or residual) value is not included in the
CBA calculation.

27
 Item
Investment I -- Buildings
Costs of Fixed Investment 0
Salvage (Residual) Value (%) 10%
Investment II -- Equipment (Overhead & underground line construction)
Costs of Fixed Investment 4,700
Salvage (Residual) Value (%) 10%
Investment III -- Land
Costs of Fixed Investment 0
Salvage (Residual) Value (%) 100%
Salvage Value of Investment 470

Figure 14. Salvage Value [Distribution]

EXERCISE 5. There are different ways of estimating salvage value. Check how the Excel
model for the sample rural infrastructure development project calculates the salvage
value applying the declining depreciation method. The declining depreciation method
denotes that (salvage value)=(total costs of fixed assets)÷(1+(depreciation rate))t,
where t=(years of project life).

3.4.4. Operating Costs

Operating costs are the costs to operate and maintain (O&M) the new or
rehabilitated/upgraded services. These costs are classified into fixed and variable costs.
To get annual operating costs during operation, we need to enter the estimated costs of
the following O&M items in the 2b.FCosts sheet:

 Input purchase
 Spares & maintenance
 Labor costs
 Skilled workers
 Unskilled workers
 Insurance
 General/administrative costs (overhead costs)

Note that as mentioned in Section I, depreciation and depreciation charges, which

appear in financial statements, are not counted as project costs, because they do not
entail cash outlays. In addition, the payment of interest and the repayment of principal
are also omitted from financial and economic cash flows, despite that they entail cash
outlays. This is because in financial analysis for public investment, the financial
sustainability of the project should be assessed, independent of its financing mode. In
addition, debt service is only a transfer of resources within a society, therefore, the
payment of interest and the repayment of principal should not be counted as economic

28
costs. This is because in economic analysis for public investment that it is important to
assess project quality independently of the funding method.
Figure 15 shows the calculation of annual operating costs for the sample power
distribution project. The estimated annual operating costs are composed of the costs of
input purchase and the costs of spares and maintenance in this specific example. The
costs of input purchase (BDT 351,824 lakh) are calculated by multiplying the annual total
(electricity) capacity to be increased by the average cost of input, which are both from
project assumption/variable values we set in the 1.Params sheet. Because the unit for
the additional supply of electricity is mega-volt ampere (MVA) per year, and one MVA is
equal to 1,000 kW, it is multiplied by 1,000 to convert into kW. Furthermore, to show the
monetary value in lakh, the estimated amount is divided by 100,000 (i.e., BDT 351,824
lakh=5,212,200 MVA per year×BDT 6.75 kWh×1,000÷100,000).
Additionally, based on the information from similar power distribution projects, the
costs of spares and maintenance are assumed as 1% of the costs of input purchase (BDT
3,518 lakh). The sum of the annual operating costs thus becomes BDT 355,342 lakh.

Local Foreign
Total
Item Currency Currency
(BDT)
(BDT) (USD)
Input Purchase (e.g., electricity purchase, wheeling charge) 351,824 0 351,824
Spares & Maintenance 3,518 0 3,518
Labor Costs 0 0 0
Skilled Workers 0 0 0
Unskilled Workers 0 0 0
Insurance 0 0 0
General/Administrative Costs (Overhead Costs) 0 0 0
Annual Operating Costs (Operation & Maintenance Costs) 355,342 0 355,342

Figure 15. Operating Costs (1) [Distribution]

Then, these annual operating costs will be allocated into the years in which they arise.
The Excel automatically generates a stream of operating costs as shown in Figure 16
(where years 1-4 and years 10-29 are omitted for space reasons).

5 6 7 8 9 30
Annual Operating Cost Levels after Construction (cumulative %) 0% 80% 87% 95% 100% 100%
Annual Operating Costs after Construction (BDT) 0 284,273 309,858 337,745 355,342 355,342

Figure 16. Operating Costs (2) [Distribution]

Note that the initial capacity utilization is set at 80% (in Year 6) and is assumed to
grow 9% annually until it reaches 100% (in Year 9) (which are specified as the project
assumption/variables of “Initial Capacity Utilization after Construction” and “Growth in
Capacity Utilization/Growth of Demand for Electricity” in the 1.Params sheet).

29
EXERCISE 6. Check how the Excel estimates the annual operating costs and allocates
them.

3.5. Step III: Identifying and Quantifying Financial Benefits

3.5.1. Identification of Financial Benefits
The third step in conducing CBA using the Excel model is to identify financial benefits
and quantify them. Financial benefits are project revenues, which can be calculated by
multiplying the sales quantity by the sales price.
In terms of financial benefits, public investment projects can be classified into the
following two types:

 Revenue-generating
 Non-revenue-generating

For non-revenue-generating projects, such as the sample rural infrastructure

development project, this step of identifying and quantifying financial benefits should be
skipped.

3.5.2. Revenues
The Excel model automatically calculates the annual revenues based on the project
assumptions/variables entered in in the 1.Params sheet.
The upper table of Figure 17 shows the calculation of annual revenues for the sample
power distribution project. The annual revenues of BDT 397,554 lakh is calculated by
multiplying the additional supply of electricity (MVA per year) by the average sales rate
(BDT per kWh) (=4,938,560×8.05×1,000÷100,000).

Item
Revenue Source I
Additional Supply of Electricity to Meet Demand per year 4,938,560
Average Sales Rate per kWh 8.05
Revenue Source II
Additional Supply of Electricity to Meet Demand per year
Average Sales Rate per kWh
Revenue Source III
Additional Supply of Electricity to Meet Demand per year
Average Sales Rate per kWh
Annual Revenues 397,554 (lakh)

1 2 3 4 5
Annual Revenue Generation during Construction (cumulative %) 0% 0% 0% 0% 0%
Annual Revenues during Construction (BDT), if any 0 0 0 0 0

Figure 17. Annual Revenues (1) [Distribution]

30
 If the project becomes partially operational during construction, the Excel
automatically generates a cash inflow in the lower table of Figure 17 (but no revenues
generated during construction for the sample power distribution project).
As shown in Figure 18 (where years 1-4 and years 10-29 are omitted for space
reasons), Excel then generates a stream of annual revenues after construction.

5 6 7 8 9 30
Annual Revenue Generation after Construction (cumulative %) 80% 87% 95% 100% 100%
Annual Revenues after Construction (BDT) n/a 318,043 346,667 377,867 397,554 397,554

Figure 18. Annual Revenues (2) [Distribution]

Note that because the initial capacity utilization was set at 80% (in Year 6) and was
assumed to grow 9% annually until it reaches 100% (in Year 9) in the 2b.FCosts sheet,
the annual revenues generated for the years 6-8 are automatically adjusted accordingly.

EXERCISE 7. Check how the Excel estimates and generates a stream of annual revenues.

3.6. Step IV: Constructing Financial Cash Flow Tables and Estimating
Financial Indicators
The fourth step in conducting CBA using the Excel model is to construct cash flow
tables of financial costs and benefits and estimate financial indicators. This step is all
taken care of by Excel, and what we need to do is carefully check the cash flow tables
and interpret the results of the performance indicators.

3.6.1. Constructing Cash Flow Tables of Financial Costs and Benefits

As shown in Figure 19 (where years 13-28 are omitted for space reasons), Excel
generates the tables of financial cash flows in the 4a.FAnalysis sheet, based on the
previous steps. The upper table of Figure 19 indicates the cash flows of financial costs
and benefits before discounting, expressed in constant (real) values (in terms of the
base year price), for the sample power distribution project. The table automatically
calculates net benefits by subtracting total costs from total benefits for each year of the
project life. As explained below, Excel calculates FNPV, FBCR, and FIRR directly from these
before-discounting data.
The lower table of Figure 19, on the other hand, indicates financial cash flows after
discounting with a financial discount rate of 12%. A series of figures (labeled “DF”) listed
between the upper and lower tables are discount factors for the corresponding years. For
example, the discount factor for Year 10 is 0.322 (=1÷1.1210). Therefore, by multiplying
the net benefits of BDT 42,212 lakh for Year 10 (in the upper table) by this discount
factor of 0.322, we will get the present value of the net benefits, which is BDT 13,591
lakh (=42,212×0.322) (in the lower table).

31
3.6.2. Estimating and Interpreting FNPV, FBCR, and FIRR
The Excel model calculates FNPV, FBCR, and FIRR, applying the following Excel
functions:

 FNPV → =NPV(rate, value1, [value2],...)

e.g.) =NPV(0.12, C5:L5)

 FBCR → =NPV(Total benefits)/NPV(Total costs)

e.g.) =NPV(0.12, C4:L4)/NPV(0.12, C3:L3)

 FIRR → =IRR(values, [guess])

e.g.) =IRR(C5:L5)

We can also calculate FNPV and FBCR manually by using the figures in the lower table
of Figure 19. For example, the present value of the total benefits (BDT 1,698,025 lakh)
minus the present value of the total costs (BDT 1,681,903 lakh) equals the present value
of the net benefits (BDT 16,122 lakh), which is consistent with the Excelʼs estimation on
FNPV. Similarly, the present value of the total benefits (BDT 1,698,025 lakh) divided by
the present value of the total costs (BDT 1,681,903 lakh) equals 1.01, which is consistent
with the Excelʼs estimation on FBCR.
Note that the 4b.FAnalysis sheet shows the financial cash flow tables in vertical (or
portrait) format (as in Figure 20), whereas the 4a.FAnalysis sheet shows the cash flow
tables in horizontal (or landscape) format (as in Figure 19).

EXERCISE 8. Check which cells the Excel refers to when it calculates FNPV and FIRR using
its functions. How does the Excel calculate BCR?

32
 Year
At Constant Prices/Before Discounting (lakh) Total Salvage
1 2 3 4 5 6 7 8 9 10 11 12 29 30
Total Costs 8,975,664 1,230 80,626 89,656 53,815 1,413 284,273 309,858 337,745 355,342 355,342 355,342 355,342 355,342 355,342
Initial Investment Costs 226,740 1,230 80,626 89,656 53,815 1,413 -- -- -- -- -- -- -- -- --
Operating Costs (Operation & Maintenance Costs) 8,749,395 0 0 0 0 0 284,273 309,858 337,745 355,342 355,342 355,342 355,342 355,342 355,342
Salvage Value (470) -- -- -- -- -- -- -- -- -- -- -- -- -- -- (470)
Total Benefits 9,788,766 0 0 0 0 0 318,043 346,667 377,867 397,554 397,554 397,554 397,554 397,554 397,554
Net Benefits 813,102 (1,230) (80,626) (89,656) (53,815) (1,413) 33,770 36,809 40,122 42,212 42,212 42,212 42,212 42,212 42,682

Financial Discount Rate (12%) DF 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 0.287 0.257 0.037 0.033

Year
Present Values (lakh) Total Salvage
1 2 3 4 5 6 7 8 9 10 11 12 29 30
Total Costs 1,681,903 1,098 64,274 63,815 34,200 802 144,022 140,164 136,410 128,140 114,411 102,152 91,207 13,284 11,861
Initial Investment Costs 164,190 1,098 64,274 63,815 34,200 802 -- -- -- -- -- -- -- -- --
Operating Costs (Operation & Maintenance Costs) 1,517,729 0 0 0 0 0 144,022 140,164 136,410 128,140 114,411 102,152 91,207 13,284 11,861
Salvage Value (16) -- -- -- -- -- -- -- -- -- -- -- -- -- -- (16)
Total Benefits 1,698,025 0 0 0 0 0 161,131 156,815 152,614 143,362 128,002 114,287 102,042 14,862 13,270
Net Benefits 16,122 (1,098) (64,274) (63,815) (34,200) (802) 17,109 16,651 16,205 15,222 13,591 12,135 10,835 1,578 1,425

FNPV 16,122 (lakh) 16,122

FBCR 1.01 1.01
FIRR 13.0%

Figure 19. Cash Flows of Financial Costs and Benefits (1) ---- Horizontal format [Distribution]

33
 At Constant Prices/Before Discounting (lakh) Present Values (lakh)
Operating Operating
Initial Costs Financial Initial Costs
Salvage Total Salvage Total
Total Costs Investment (Operation & Net Benefits Discount Rate Total Costs Investment (Operation & Net Benefits
Value Benefits Value Benefits
Costs Maintenance (12%) Costs Maintenance
Costs) Costs)
Total 8,975,664 226,740 8,749,395 (470) 9,788,766 813,102 DF Total 1,681,903 164,190 1,517,729 (16) 1,698,025 16,122
1 1,230 1,230 0 -- 0 (1,230) 0.893 1 1,098 1,098 0 -- 0 (1,098)
2 80,626 80,626 0 -- 0 (80,626) 0.797 2 64,274 64,274 0 -- 0 (64,274)
3 89,656 89,656 0 -- 0 (89,656) 0.712 3 63,815 63,815 0 -- 0 (63,815)
4 53,815 53,815 0 -- 0 (53,815) 0.636 4 34,200 34,200 0 -- 0 (34,200)
5 1,413 1,413 0 -- 0 (1,413) 0.567 5 802 802 0 -- 0 (802)
6 284,273 -- 284,273 -- 318,043 33,770 0.507 6 144,022 -- 144,022 -- 161,131 17,109
7 309,858 -- 309,858 -- 346,667 36,809 0.452 7 140,164 -- 140,164 -- 156,815 16,651
8 337,745 -- 337,745 -- 377,867 40,122 0.404 8 136,410 -- 136,410 -- 152,614 16,205
9 355,342 -- 355,342 -- 397,554 42,212 0.361 9 128,140 -- 128,140 -- 143,362 15,222
10 355,342 -- 355,342 -- 397,554 42,212 0.322 10 114,411 -- 114,411 -- 128,002 13,591
11 355,342 -- 355,342 -- 397,554 42,212 0.287 11 102,152 -- 102,152 -- 114,287 12,135
12 355,342 -- 355,342 -- 397,554 42,212 0.257 12 91,207 -- 91,207 -- 102,042 10,835
13 355,342 -- 355,342 -- 397,554 42,212 0.229 13 81,435 -- 81,435 -- 91,109 9,674
14 355,342 -- 355,342 -- 397,554 42,212 0.205 14 72,710 -- 72,710 -- 81,347 8,637
15 355,342 -- 355,342 -- 397,554 42,212 0.183 15 64,920 -- 64,920 -- 72,632 7,712
Year Year
16 355,342 -- 355,342 -- 397,554 42,212 0.163 16 57,964 -- 57,964 -- 64,850 6,886
17 355,342 -- 355,342 -- 397,554 42,212 0.146 17 51,754 -- 51,754 -- 57,901 6,148
18 355,342 -- 355,342 -- 397,554 42,212 0.130 18 46,208 -- 46,208 -- 51,698 5,489
19 355,342 -- 355,342 -- 397,554 42,212 0.116 19 41,258 -- 41,258 -- 46,159 4,901
20 355,342 -- 355,342 -- 397,554 42,212 0.104 20 36,837 -- 36,837 -- 41,213 4,376
21 355,342 -- 355,342 -- 397,554 42,212 0.093 21 32,890 -- 32,890 -- 36,797 3,907
22 355,342 -- 355,342 -- 397,554 42,212 0.083 22 29,366 -- 29,366 -- 32,855 3,489
23 355,342 -- 355,342 -- 397,554 42,212 0.074 23 26,220 -- 26,220 -- 29,335 3,115
24 355,342 -- 355,342 -- 397,554 42,212 0.066 24 23,411 -- 23,411 -- 26,192 2,781
25 355,342 -- 355,342 -- 397,554 42,212 0.059 25 20,902 -- 20,902 -- 23,385 2,483
26 355,342 -- 355,342 -- 397,554 42,212 0.053 26 18,663 -- 18,663 -- 20,880 2,217
27 355,342 -- 355,342 -- 397,554 42,212 0.047 27 16,663 -- 16,663 -- 18,643 1,979
28 355,342 -- 355,342 -- 397,554 42,212 0.042 28 14,878 -- 14,878 -- 16,645 1,767
29 355,342 -- 355,342 -- 397,554 42,212 0.037 29 13,284 -- 13,284 -- 14,862 1,578
30 355,342 -- 355,342 -- 397,554 42,682 0.033 30 11,861 -- 11,861 -- 13,270 1,425
Salvage (470) Salvage (16)

FNPV 16,122 (lakh)

FBCR 1.01
FIRR 13.0%

Figure 20. Cash Flows of Financial Costs and Benefits (2) ---- Vertical format [Distribution]

34
3.7. Step V: Identifying and Quantifying Economic Costs
From this section forward, we start preparing cash flow tables for economic analysis.
Economic analysis assesses if the project generates economic benefits above economic
costs from a perspective of the society as a whole.

3.7.1. Identification of Economic Costs

The fifth step in conducting CBA using the Excel model is to identify economic costs
and quantify them. Economic costs are estimated on the basis of financial costs we have
already measured. However, because economic costs (and benefits) are estimated from
a perspective of the society as a whole (as opposed to a perspective of the project
implementing entity), the following items are treated differently in between financial and
economic analysis (also see Table 1).

 Transfer payments (e.g., taxes, subsidies) included in financial analysis must

be excluded in economic analysis
 Externalities (e.g., pollution) excluded in financial analysis must be included in
economic analysis
 Other indirect (or intangible) costs, which do no entail actual expenditures
but reduce the economic welfare of the society, must be included in economic
analysis

In addition, because financial prices deviate from economic prices due to government
interventions and/or market distortions, financial costs must be converted into economic
costs to evaluate them in non-distorted, economic prices.

3.7.2. Tangible Expenditures

The financial costs estimated in the previous steps are tangible or actual expenditures.
If there are any transfer payments included in the total initial investment costs, they must
be excluded from the calculation of economic costs before conversion, as they simply
transfer resources from one party to another within a society.
Figure 21 shows the conversion of financial costs into economic costs for the sample
power distribution project. To remove the effects of price distortions, the Conversion
Factor for traded goods of 1.15 is applied to the financial costs (of total initial investment
costs, salvage value, and operating costs). (Note that the breakdowns of initial
investment costs during construction and the operating costs after construction,
automatically generated by Excel, are omitted in Figure 21 for space reasons.)

35
Conversion Factor
Shadow Price Factor (SPF) [=1/Conversion Factor for Traded Goods] 0.87
Shadow Wage Rate Factor (SWRF) [=1/Conversion Factor for Unskilled Labor] 0.69

Financial Costs Economic Costs

Local Foreign Local Foreign
Total Total
Item Currency Currency
(BDT)
➡ Item Currency Currency
(BDT)
(BDT) (USD) (BDT) (USD)
Materials & Equipment Costs 0 0 0 Materials & Equipment Costs [=LC*SPF+FC*(Exchange Rate)] 0 0 0
Labor Costs 0 0 0 Labor Costs 0 0 0
Skilled Workers 0 0 0 Skilled Workers [=LC*SPF+FC*(Exchange Rate)] 0 0 0
Unskilled Workers 0 0 0 Unskilled Workers [=LC*SWRF+FC*(Exchange Rate)] 0 0 0
Land Acquisition/Compensation Costs 0 0 0 Land Acquisition/Compensation Costs [=LC*SPF+FC*(Exchange Rate)] 0 0 0
Consultant Costs 0 0 0 Consultant Costs [=LC*SPF+FC*(Exchange Rate)] 0 0 0
General/Administrative Costs (Overhead Costs) 0 0 0 General/Administrative Costs (Overhead Costs) [=LC*SPF+FC*(Exchange Rate)] 0 0 0
Taxes, Subsidies (Transfers) 0 0 0 Taxes, Subsidies (Transfers) -- -- --
Base Costs (w/o Contingencies) 0 0 0 Base Costs (w/o Contingencies) - Transfers 0 0 0
Physical Contingency (2%) 0 0 0 Physical Contingency [=LC*SPF+FC*(Exchange Rate)] 0 0 0
Price Contingency, Local currency (5%) / Foreign currency (5%) 0 0 0 Price Contingency -- -- --
Total Initial Investment Costs (w/ Contingencies) 0 0 0 Total Initial Investment Costs (w/ Contingencies) -- -- --
Total Initial Investment Costs (BC + Physical Contingency) 0 0 0 Total Initial Investment Costs (BC + Physical Contingency) - Transfers 0 0 0

Cost Data LC FC Total Cost Data LC FC Total

Taxes, Subsidies (Transfers) 0 0 0 Taxes, Subsidies (Transfers) -- -- --
Base Costs (w/o Contingencies) 222,294 0 222,294 Base Costs (w/o Contingencies) - Transfers 193,299 0 193,299
Physical Contingency 4,446 0 4,446 Physical Contingency 3,866 0 3,866
Price Contingency 11,115 0 11,115 Price Contingency -- -- --
Total Initial Investment Costs (w/ Contingencies) 237,854 0 237,854 Total Initial Investment Costs (w/ Contingencies) -- -- --
Total Initial Investment Costs (BC + Physical Contingency) 226,740 0 226,740 Total Initial Investment Costs (BC + Physical Contingency) - Transfers 197,165 0 197,165

Financial Costs Economic Costs

Item ➡ Item

Salvage Value of Investment 470 Salvage Value of Investment [=TC*SPF] 409 (lakh)

Financial Costs Economic Costs

Local Foreign Local Foreign
Total Total
Item Currency Currency
(BDT)
➡ Item Currency Currency
(BDT)
(BDT) (USD) (BDT) (USD)
Input Purchase (e.g., electricity purchase, wheeling charge) 351,824 0 351,824 Input Purchase [=LC*SPF+FC*(Exchange Rate)] 305,933 0 305,933
Spares & Maintenance 3,518 0 3,518 Spares & Maintenance [=LC*SPF+FC*(Exchange Rate)] 3,059 0 3,059
Labor Costs 0 0 0 Labor Costs 0 0 0
Skilled Workers 0 0 0 Skilled Workers [=LC*SPF+FC*(Exchange Rate)] 0 0 0
Unskilled Workers 0 0 0 Unskilled Workers [=LC*SWRF+FC*(Exchange Rate)] 0 0 0
Insurance 0 0 0 Insurance [=LC*SPF+FC*(Exchange Rate)] 0 0 0
General/Administrative Costs (Overhead Costs) 0 0 0 General/Administrative Costs (Overhead Costs) [=LC*SPF+FC*(Exchange Rate)] 0 0 0
Annual Operating Costs (Operation & Maintenance Costs) 355,342 0 355,342 Annual Operating Costs (Operation & Maintenance Costs) 308,993 0 308,993

Figure 21. Conversion of Financial Costs into Economic Costs [Distribution]

Excel converts financial costs into economic costs by applying the Shadow Price
Factor, which is the inverse of the Conversion Factor for traded goods.

 (Economic costs)=(Financial costs)×(Shadow price factor)

where (Shadow price factor)=1÷(Conversion factor for traded goods)

If the conversion factor for traded goods is 1.15, the shadow price factor is 0.87 (=1
÷1.15). Thus, the operating costs of BDT 355,342 lakh become BDT 308,993 lakh
(=355,342×0.87) after conversion.

Figure 22 illustrates the concept of converting project costs evaluated in distorted

prices into those in non-distorted prices, using a simplified example of the economy with
one product. In the ideal world where there is no government intervention or market
distortion, the price of product X is BDT 100. However, in the real world, a 15% duty is
levied on project X. Therefore, the conversion factor for traded goods and the shadow
price factor are used to estimate the economic costs.

36
 Figure 22. A Simplified Example: Conversion Factor and Shadow Price Factor

EXERCISE 9. Check how Excel converts financial costs into economic costs using the
conversion factor for trade goods/shadow price factor.

3.7.3. Indirect Costs

If there are any (negative) externalities or other unintended welfare losses due to a
project, they also must be counted as economic costs. For example, the project might
negatively affect the economic welfare of some segments of population, even though its
overall impact on the entire society is positive. In fact, the sample rural infrastructure
development project is expected to decrease the average household income of some
population who live in certain areas, because a number of people and businesses
currently visiting these areas for purchasing some goods and services will be diverted to
other, newly accessible areas after the project completion.
The Excel model estimates these losses of income based on a set of project
assumptions/variables specified in the 1.Params sheet. More specifically, as shown in
Figure 23 (where years 2-4 and years 8-28 are omitted for space reasons), it is estimated
that approximately 13,000 people live in negatively affected areas at the start of the
project. Because the average household size is 5.2, it translates into about 2,500
households living in the negatively affected areas in Year 1. With the annual population
growth of 1.37%, by Year 6, there will be 2,676 households in the negatively affected
areas (=(13,000×(1+0.0137)5)÷5.2, or 2,500×(1+0.0137)5). It is also assumed that
the average monthly household income in the negatively affected areas is BDT 23,000
(or the average annual household income of BDT 276,000). Thus, the total sum of the
annual household incomes earned by all the households living in the negatively affected
areas will be BDT 7,386 lakh (=2,676×276,000÷105) in Year 6 if there were no project.
Because the loss of household income due to the project is estimated to be 4%, the loss
of the total annual household incomes earned by all the households living in the negatively

37
affected areas will be BDT 295 lakh (=7,386×0.04) in Year 6. The loss of the total annual
household incomes for other years can be calculated in a similar manner.

1 5 6 7 29 30
Population in Negativey Affected Areas 13,000 13,728 13,916 14,107 19,031 19,292
Households in Negativey Affected Areas 2,500 2,640 2,676 2,713 3,660 3,710
Total Annual Income Earned by Households in NAA without the Project 6,900 7,286 7,386 7,488 10,101 10,240
Indirect Costs 1 5 6 7 29 30
Decrease in Total Annual Income for Households in NAA due to the Project 0 0 295 300 404 410

Figure 23. Indirect Costs [Rural Infrastructure]

EXERCISE 10. Check the various assumptions on which the Excel modelʼs calculation of
indirect costs is based.

3.8. Step VI: Identifying and Quantifying Economic Benefits

3.8.1. Identification of Economic Benefits
The sixth step in conducting CBA using the Excel model is to identify economic
benefits and value them in monetary terms. Sources of economic benefits may fall into
the following categories:

 Consumerʼs surplus
 Incremental outputs (benefits)
 Non-incremental outputs (benefits)
 Producerʼs (or Supplierʼs) surplus
 Revenue
 Indirect benefits

Incremental outputs (benefits) are the additional outputs of goods and/or services
supplied by the project that meet additional demand. In the sample power distribution
project and the sample power transmission project, the incremental outputs refer to the
additional outputs of electricity distributed and transmitted by the respective project.
Non-incremental outputs (benefits), on the other hand, are the project outputs
that replace existing, less reliable supply with new, more reliable ones. In short, non-
incremental outputs refer to resource cost savings. As illustrated in Figure 24, both
incremental outputs and non-incremental outputs represent an increase in consumerʼs
surplus, owning to the project.

38
 Figure 24. Increases in Consumerʼs Surplus and Providerʼs Surplus

Revenues are basically the same as financial benefits estimated in Step III. But the
financial benefits must be re-evaluated in terms of economic prices to convert them into
economic benefits. An increase in revenues is expected to increase operational profits,
which represent producerʼs surplus (see Figure 2410).

Note that for non-revenue-generating projects, such as the sample rural

infrastructure development project, neither incremental outputs nor non-incremental
outputs usually can be calculated, as the project outputs are not transacted in markets.
In that case, project benefits must be measured either by estimating consumersʼ
willingness to pay (WTP) for the project outputs (using stated or revealed preference
methods) or by estimating the indirect impact of the project outputs on the economic
welfare of the society (i.e., indirect benefits)11, which is explained below. In general,
estimating WTP for project benefits is not recommended as it is known to be unreliable.

3.8.2. Incremental Outputs (Benefits)

For the sample power distribution and power transmission projects, the Excel model
automatically calculates the incremental outputs based on the project assumptions/
variables entered in the 1.Params sheet. The valuation of the incremental outputs can be

10
The supply curve is actually vertical for projects like the sample power distribution project and the
sample power transmission project, because the market is monopolistic and the supply is fixed,
regardless of the price.
11
For example, the impact of rural roads on household incomes may be estimated using a sample of
villages with and without access to rural roads.

39
understood graphically as the estimation of the light blue-colored area of the triangle in
Figure 25.

Figure 25. Consumerʼs Surplus and Providerʼs Surplus

Figure 26 shows the calculation of incremental outputs using the sample power
distribution project. First, the difference between the cost of electricity produced privately
(i.e., choke price) and the average sales rate (market clearing price) is calculated (i.e.,
12.00-8.05=3.95 per kWh). Note that the cost of electricity produced privately
corresponds to Pc and the average sales rate corresponds to P* in Figure 25. This
difference is the height of the triangle. Second, to calculate the area of the triangle, the
height is multiplied by the base of the triangle (i.e., additional supply of electricity of
4,938,560 MVA per year) and divided by two (i.e., 3.95×4,938,560÷2×1,000
÷100,000=97,537, after converting MVA into kW and BDT into BDT lakh). Finally, to
avoid triple counting of incremental outputs with generation and transmission projects,
the estimated incremental outputs are simply divided by three (i.e., 97,537÷3=32,512).
As a result, the incremental outputs attributable to the power distribution project
becomes BDT 32,512 lakh.

Item
Additional Supply of Electricity to Meet Demand per year (a) 4,938,560
Average Sales Rate per kWh (b) 8.05
Cost of Electricity Produced Privately per kWh (c) 12.00
Total Annual Incremental Outputs [=0.5*a*(c-b)] 97,537
Indirect Benefits Attributable to Generation/Transmission (66.7%) 65,024
Annual Incremental Outputs Attributable to Distribution 32,512

Figure 26. Incremental Outputs (1) [Distribution]

40
 The Excel example for the power transmission project calculates incremental outputs
in a similar fashion but estimates incremental outputs for residential customers and
commercial customers separately (see Figure 27).

Item
Residential Customers
Wheeled Energy/Additional Supply of Electricity to Meet Demand (a) 6,521
Average Sales Rate for Residential (b) 7.49
Cost of Electricity Produced Privately for Residential (c) 12.00
Annual Incremental Outputs for Residential [=0.5*a*(c-b)] 147,042
Commercial Customers
Wheeled Energy/Additional Supply of Electricity to Meet Demand (a) 4,201
Average Sales Rate for Residential (b) 9.80
Cost of Electricity Produced Privately for Commercial (c) 12.00
Annual Incremental Outputs for Commercial [=0.5*a*(c-b)] 46,207
Total Annual Incremental Outputs 193,249
Indirect Benefits Attributable to Generation/Distribution (66.7%) 128,833
Annual Incremental Outputs Attributable to Transmission 64,416

Figure 27. Incremental Outputs (2) [Transmission]

EXERCISE 11. Check how Excel calculates the area of the triangle in Figure 25 for the
estimation of incremental outputs.

3.8.3. Non-Incremental Outputs (Benefits)

As mentioned, non-incremental outputs refer to cost savings to be enjoyed by the
existing customers. In the sample power distribution project, for example, the non-
incremental outputs are expected to be materialized through a reduction in load shedding.
Without the project, the existing customers have to produce electricity privately during
load shedding (e.g., using a generator). With the project, this existing, less reliable supply
of electricity will be replaced by the new, more reliable supply.
The Excel model automatically calculates the non-incremental outputs for the power
distribution project by multiplying the number of the existing customers by the average
cost savings per customer. The amount of the average cost savings per customer is
estimated as the estimated reduction in the time of load shredding per year times the
difference between the cost of producing electricity privately and the average sales rate.
The sum of total annual cost savings, therefore, is estimated to be BDT 288 lakh
(=100,000×73.0×(12.0-8.05)÷100,000). Then, to avoid triple counting of non-
incremental outputs with generation and transmission projects, the non-incremental

41
outputs attributable to distribution are calculated by simply dividing the total non-
incremental outputs by three (i.e., 288÷3=96) (see Figure 28).

Item
Average Sales Rate per kWh (b) 8.05
Cost of Electricity Produced Privately per kWh (c) 12.00
Existing Customers (d) 100,000
Reduction in Load Shedding per year (e) 73.0
Total Annual Cost Savings (Reliability Benefits) [=(c-b)*d*e] 288
Indirect Benefits Attributable to Generation/Transmission (66.7%) 192
Annual Non- incremental Outputs Attributable to Distribution 96
Figure 28. Non-Incremental Outputs (1) [Distribution]

The non-incremental outputs for the sample power transmission project, on the other
hand, are more generically estimated, assuming that a certain percentage of total
population in the project area will enjoy a certain amount of cost savings. Specifically, the
Excel model calculates (based on the project assumptions/variables we set in the
1.Params sheet) that 1% of a total of 1,332,805 customers will be able to achieve an
annual saving of BDT 1,000 owning to the project. As a result, the total annual cost
savings are estimated to be BDT 133 lakh (=1,332,805×0.01×1,000÷100,000), and the
estimated non-incremental outputs attributable to distribution are estimated to be BDT
44 lakh (=133÷3) (see Figure 29).

Item
Existing Total Customers (c) 1,332,805
Percent of Existing Total Customers who Benefit from Cost Savings (d) 1.00%
Avg. Cost Savings per Customer (e) 1,000
Total Annual Cost Savings (Reliability Benefits) [=c*d*e] 133
Indirect Benefits Attributable to Generation/Distribution (66.7%) 89
Annual Non-incremental Outputs Attributable to Transmission 44
Figure 29. Non-Incremental Outputs (2) [Transmission]

EXERCISE 12. Check how the Excel model calculates the non-incremental outputs.

3.8.4. Revenue
Similar to the conversion of financial costs into economic costs, the financial
benefits/revenues estimated for financial analysis must be converted into economic
benefits by evaluating them in economic prices. Excel will automatically convert financial
benefits/revenues into economic benefits by applying the shadow price factor.

42
 Figures 30 and 31 show examples for the sample power distribution project and the
sample power transmission project, respectively. To remove the effects of price
distortions, the conversion factor for trade goods of 1.15, or the shadow price factor of
0.87 is applied. For the power distribution project, the incremental revenues evaluated in
economic prices becomes BDT 345,699 lakh (=397,554×(1÷1.15)=397,554×0.87), and
that for the power transmission project becomes BDT 26,020 lakh (=29,923×
(1÷1.15)=29,923×0.87).

Conversion Factor
Shadow Price Factor (SPF) [=1/Conversion Factor for Traded Goods] 0.87
Shadow Wage Rate Factor (SWRF) [=1/Conversion Factor for Unskilled Labor] 0.69

Financial Benefits/Revenues Economic Benefits/Revenues

Item ➡ Item

Revenue Source I Revenue Source I

Additional Supply of Electricity to Meet Demand per year 4,938,560 Additional Supply of Electricity to Meet Demand per year
Average Sales Rate per kWh 8.05 Average Sales Rate per kWh
Revenue Source II Revenue Source II
Additional Supply of Electricity to Meet Demand per year Additional Supply of Electricity to Meet Demand per year
Average Sales Rate per kWh Average Sales Rate per kWh
Revenue Source III Revenue Source III
Additional Supply of Electricity to Meet Demand per year Additional Supply of Electricity to Meet Demand per year
Average Sales Rate per kWh Average Sales Rate per kWh
Annual Revenues 397,554 (lakh) Annual Revenues [=LC*SPF] 345,699

Figure 30. Revenue (1) [Distribution]

Financial Benefits/Revenues Economic Benefits/Revenues

Item ➡ Item

Revenue Source I Revenue Source I

Incremental Load Flow/Total Capacity to be Increased 1398.63 (MW/hour) Incremental Load Flow/Total Capacity to be Increased
Load Factor 90.0% (%) Load Factor
Gross Annual Energy (considering the Load Factor) 11026.80 (mil.kWh/year) Gross Annual Energy (considering the Load Factor)
Transmission Loss 2.77% (%) Transmission Loss
Wheeled Energy/Additional Supply of Electricity to Meet Demand (a) 10721.36 (mil.kWh/year) Wheeled Energy/Additional Supply of Electricity to Meet Demand (a)
Wheeling Charge (b) 0.28 (BDT/Wh) Wheeling Charge (b)
Revenues from Wheeling Charge (a)*(b) 29,923 (lakh) Revenues from Wheeling Charge (a)*(b) [=LC*SPF] 26,020
Revenue Source II Revenue Source II
Wheeled Energy/Additional Supply of Electricity to Meet Demand (a) Wheeled Energy/Additional Supply of Electricity to Meet Demand (a)
Wheeling Charge (b) Wheeling Charge (b)
Revenues from Wheeling Charge (a)*(b) Revenues from Wheeling Charge (a)*(b) [=LC*SPF]
Revenue Source III Revenue Source III
Wheeled Energy/Additional Supply of Electricity to Meet Demand (a) Wheeled Energy/Additional Supply of Electricity to Meet Demand (a)
Wheeling Charge (b) Wheeling Charge (b)
Revenues from Wheeling Charge (a)*(b) Revenues from Wheeling Charge (a)*(b) [=LC*SPF]
Annual Revenues 29,923 (lakh) Annual Revenues [=LC*SPF] 26,020

Figure 31. Revenue (2) [Transmission]

EXERCISE 13. Confirm that the way the Excel model converts financial revenues into
economic revenues is identical to the way it converts financial costs into economic costs.

3.8.5. Indirect Benefits

As mentioned, neither incremental outputs nor non-incremental outputs usually can
be calculated for non-revenue-generating projects, such as the sample rural
infrastructure development project, because the project outputs are not transacted in
markets. Thus, the Excel model tries to approximate the impact of the project on the

43
economic welfare of the society through the estimation of indirect benefits12. The Excel
model for the sample rural infrastructure development project, for example, estimates
the following indirect benefits:

 Commercial benefits – for those who will enjoy higher demands for their
products and services owning to better access to markets and distribution
channels
 Agricultural households
 MSME (micro, small, medium-sized enterprises) households
 Educational benefits – for those who will avoid dropping out of school and
complete high school education owning to better access to schools
 Health benefits – for the pregnant women whose lives will be saved owning to
better access to maternal health services

First, an increase in total annual income earned by all agricultural households is

calculated by multiplying the total annual income earned by all agricultural households
(without the project) by the estimated percentage increase in total income owning to the
project. As demonstrated in Figure 32 (where years 2-4 and years 8-28 are omitted for
space reasons), the Excel model first estimates the total annual income earned by all
agricultural households by multiplying the average annual income for agricultural
households by the number of agricultural households. In the sample rural infrastructure
development project, the percentage of agricultural households in total households is
estimated to be 45%, and the total population is expected to grow 1.37% annually during
the project life. Because the total population in Year 1 is 35,000, it grows to 37,464 by
Year 6 (=35,000×(1+0.0137)5). Given that the average household size is 5.2, the
number of households becomes 7,205 in Year 6 (=37,464÷5.2), of which 3,242 (=7,205
×0.45) are agricultural households. The average monthly income of BDT 12,000 for
agricultural households means the average annual income of BDT 144,000 (=12,000×
12). Thus, the total annual income earned by all agricultural households (in lakh) in Year
6, can be obtained by multiplying this by the number of agricultural households in Year
6; that is, (144,000×3,242)÷100,000=4,668.48 or BDT 4,668.48 lakh. Because
agricultural income is expected to increase by 20% due to the project, an increase in total
annual income earned by all agricultural households will be BDT 933.70 lakh in Year 6. A
stream of incomes for subsequent years can be calculated in a similar manner.

12
Another way of measuring project benefits for non-revenue-generating projects is to estimate
consumersʼ willingness to pay (WTP) for the project outputs (using stated or revealed preference
methods). However, estimating WTP for project benefits is known to be less reliable.

44
 Using the same analytical framework, an increase in total annual income earned by
all MSME households can be calculated.

Indirect Benefits
1 5 6 7 29 30
Population 35,000 36,958 37,464 37,977 51,230 51,932
Households 6,731 7,107 7,205 7,303 9,852 9,987
Agricultural Households 3,029 3,198 3,242 3,286 4,433 4,494
MSME Households 505 533 540 548 739 749
High School Students 7,000 7,392 7,493 7,595 10,246 10,386
Student Dropouts 700 739 749 760 1,025 1,039
Reduction in Student Dropouts 0 0 75 76 103 104
Female Population 17,500 18,479 18,732 18,989 25,615 25,966
Female Population from Age 15 to 44 8,750 9,240 9,366 9,495 12,808 12,983
Women Giving Birth 700 739 749 760 1,025 1,039
Maternal Deaths 1 1 1 1 2 2
Reduction in Maternal Deaths 0 0 1 1 1 1
Total Annual Income for Agricultural Households 4,361.76 4,605.12 4,668.48 4,731.84 6,383.52 6,471.36
Total Annual Income for MSME Households 1,515.00 1,599.00 1,620.00 1,644.00 2,217.00 2,247.00
Commercial Benefits 1 5 6 7 29 30
Increase in Total Annual Income for Agricultural Households 0 0 933.70 946.37 1,276.70 1,294.27
Increase in Total Annual Income for MSME Households 0 0 405.00 411.00 554.25 561.75
Increase in Total Annual Income for Agricultural/MSME Households 0 0 1,338.70 1,357.37 1,830.95 1,856.02
Educational Benefits 1 5 6 7 29 30
Increase in Total Annual Income for Those Who Avoided Dropout 0 0 29.39 59.56 201.80 203.76
Health Benefits 1 5 6 7 29 30
Total Value Obtained from Saving Maternal Lives 0 0 0.55 0.55 0.55 0.55

Figure 32. Indirect Benefits [Rural Infrastructure]

Second, education benefits are estimated on the assumptions that the project will
reduce the high school dropout rate, which will in turn contribute to an increase in income
earned by those who avoid dropping out of school and complete high school education.
The Excel model estimates that 20% of total population (i.e., 35,000 in Year 1) are high
school-aged students. Thus, the number of high school-aged students is 7,000 (=35,000
×0.20) in Year 1. Because the population is expected to grow 1.37% annually, the
number of high school-aged students becomes 7,493 (=7,000×(1+0.0137)5) by Year 6.
The Excel model further assumes that the annual dropout rate is initially 10% but will
decrease by 10% to 9% (=0.10×0.9), as a result of the project. Thus, in Year 6, the
number of students dropping out of school will be 749 (=7,493×0.10) without the project.
But with project, that number will decrease by 75 (=749×0.10). Furthermore, the model
estimates that an increase in annual personal income due to the avoidance of dropout is
the BDT 195,923 (see the 1.Params sheet for details). Thus, the increase in total annual
income earned by those who avoid dropout would be BDT 146.94 lakh (=195,923×
75÷100,000) in Year 6. The model, at the same time, assumes that only 20% of that full
potential effects will materialize in the first year after project completion. As a result, the
educational benefits in Year 6 is BDT 29.39 lakh (=146.94×0.20). A stream of increased
incomes for subsequent years can be calculated in a similar manner (see Figure 32).

45
 Finally, the health benefits are estimated on the assumptions that the project will
reduce the maternal mortality of pregnant women through the provision of better access
to maternal health services and that the estimated monetary value of a womanʼs life
saved is BDT 54,553 per year. The Excel model estimates that 50% of total population
(i.e., 35,000 in Year 1) are women, of which 50% are aged from 15 to 44. Thus, the
number of reproductive-aged women is about 8,750 (=35,000×0.50×0.50) in Year 1.
Because the population is expected to grow 1.37% annually, the number of reproductive-
aged women becomes 9,366 (=8,750×(1+0.0137)5) by Year 6. The Excel model further
assumes that 8% of reproductive-aged women give birth every year and that the
maternal mortality rate is 173 deaths per every 100,000 births without the project but
will decrease by 70% to 52 deaths per every 100,000 births with the project. Therefore,
in Year 6, the number of maternal deaths will be about 1.3 (=9,366×0.08×0.000173)
without the project. But with project, that number will decrease to about 0.7 (=9,366×
0.08×0.000052). (These numbers are rounded to the nearest integer in the model.)
Furthermore, with the estimated monetary value of BDT 54,553 per year for a womanʼs
life, the health benefits enjoyed by pregnant women whose lives are saved will be BDT
0.55 lakh (=1×54,553÷100,000) in Year 6. Again, a stream of increased incomes for
subsequent years can be calculated in a similar manner. Note that the health benefits
expected from the sample rural infrastructure development project are very small
compared to the commercial and educational benefits (see Figure 32).
In theory, there are two other potential sources for the project benefits of an
infrastructure development project, which would be more direct than the indirect benefits
explained. One is cost savings, arising mainly from spending less on fuel expenditures,
and the other is travel time savings, resulting in a reduction in opportunity cost (by
being able to spend more time on productive activities).13 However, the sizes of these
benefits are usually very small for rural infrastructure development projects, as contrary
for urban infrastructure development projects. This is because rural infrastructure
development projects usually have little to do with the resolution of traffic congestion. As
a result, the Excel model for the sample rural infrastructure development project does
not take into account the benefits from the cost and travel time savings.

EXERCISE 14. Check how the Excel model estimates indirect benefits. Confirm that
estimation relies heavily on the assumptions/variables that come from outside the Excel
model.

13
Note that the cost savings and travel time savings are not mutually exclusive to the indirect benefits,
such as commercial, educational, and health benefits estimated above.

46
3.9. Step VII: Constructing Economic Cash Flow Tables and Estimating
Economic Indicators
3.9.1. Constructing Cash Flow Tables of Economic Costs and Benefits
The seventh step in conducing CBA using the Excel model is to construct cash flow
tables of economic costs and benefits and estimate economic indicators.
Figure 33 (where years 13-28 are omitted for space reasons) shows economic cash
flows for the sample rural infrastructure development project. The upper table illustrates
the cash flows of economic costs and benefits before discounting. The lower table, on
the other hand, shows economic cash flows after discounting with a social discount rate
of 12%. A series of figures (labeled “DF”) listed between the upper and lower tables are
discount factors for the corresponding years.

3.9.2. Estimating and Interpreting ENPV, EBCR, and EIRR

The Excel model calculates ENPV, EBCR, and EIRR, applying Excel functions, such as
NPV() and IRR(), to a (before-discounting) cash flow of net benefits. We can also
manually calculate ENPV and EBCR from the lower table of Figure 33. For example, the
present value of the total benefits (BDT 7,142 lakh) minus the present value of the total
costs (BDT 4,611 lakh) equals the present value of the net benefits (BDT 2,531 lakh),
which is consistent with the Excelʼs estimation of ENPV. Similarly, the present value of the
total benefits (BDT 7,142 lakh) divided by the present value of the total costs (BDT 4,611
lakh) equals 1.55, which is again consistent with the Excelʼs estimation of EBCR.
Note that the 7b.EAnalysis sheet shows the economic cash flow tables in vertical (or
portrait) format (as in Figure 34), whereas the 7a.EAnalysis sheet shows the cash flow
tables in horizontal (or landscape) format (as in Figure 33).

EXERCISE 15. Double-check how the Excel calculates ENPV, EBCR, and EIRR.

47
 Year
At Constant Prices/Before Discounting (lakh) Total Salvage
1 2 3 4 5 6 7 8 9 10 11 12 29 30
Total Costs 14,710 166 414 1,242 1,863 455 378 382 386 391 395 399 403 487 492
Initial Investment Costs 4,139 166 414 1,242 1,863 455 -- -- -- -- -- -- -- -- --
Operating Costs (Operation & Maintenance Costs) 2,069 0 0 0 0 0 83 83 83 83 83 83 83 83 83
Salvage Value (237) -- -- -- -- -- -- -- -- -- -- -- -- -- -- (237)
Decrease in Income for HHs in Negatively Affected 8,739 0 0 0 0 0 295 300 304 308 312 316 321 404 410
Total Benefits 43,659 0 0 0 0 0 1,369 1,417 1,467 1,518 1,570 1,590 1,612 2,033 2,060
Increase in Income for Agricultural/MSME HHs 39,601 0 0 0 0 0 1,339 1,357 1,376 1,395 1,414 1,433 1,453 1,831 1,856
Increase in Income for Those Who Avoided Dropout 4,044 0 0 0 0 0 29 60 91 122 155 157 159 202 204
Value Obtained from Saving Maternal Lives 14 0 0 0 0 0 1 1 1 1 1 1 1 1 1
Net Benefits 28,949 (166) (414) (1,242) (1,863) (455) 990 1,035 1,080 1,127 1,175 1,191 1,209 1,546 1,805

Economic Discount Rate (12%) DF 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 0.287 0.257 0.037 0.033

Year
Present Values (lakh) Total Salvage
1 2 3 4 5 6 7 8 9 10 11 12 29 30
Total Costs 4,611 148 330 884 1,184 258 192 173 156 141 127 115 104 18 16
Initial Investment Costs 2,804 148 330 884 1,184 258 -- -- -- -- -- -- -- -- --
Operating Costs (Operation & Maintenance Costs) 368 0 0 0 0 0 42 37 33 30 27 24 21 3 3
Salvage Value (8) -- -- -- -- -- -- -- -- -- -- -- -- -- -- (8)
Decrease in Income for HHs in Negatively Affected 1,447 0 0 0 0 0 150 135 123 111 100 91 82 15 14
Total Benefits 7,142 0 0 0 0 0 693 641 592 547 505 457 414 76 69
Increase in Income for Agricultural/MSME HHs 6,556 0 0 0 0 0 678 614 556 503 455 412 373 68 62
Increase in Income for Those Who Avoided Dropout 583 0 0 0 0 0 15 27 37 44 50 45 41 8 7
Value Obtained from Saving Maternal Lives 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net Benefits 2,531 (148) (330) (884) (1,184) (258) 502 468 436 406 378 342 310 58 60

ENPV 2,531 (lakh) 2,531

EBCR 1.55 1.55
EIRR 20.4%

Figure 33. Cash Flows of Economic Costs and Benefits (1) [Rural Infrastructure]

48
 At Constant Prices/Before Discounting (lakh) Present Values (lakh)
Operating Decrease in Increase in Value Operating Decrease in Increase in Value
Increase in Increase in
Initial Costs Income for Income for Obtained from Economic Initial Costs Income for Income for Obtained from
Salvage Total Income for Salvage Total Income for
Total Costs Investment (Operation & HHs in Those Who Saving Net Benefits Discount Rate Total Costs Investment (Operation & HHs in Those Who Saving Net Benefits
Value Benefits Agricultural/ Value Benefits Agricultural/
Costs Maintenance Negatively Avoided Maternal (12%) Costs Maintenance Negatively Avoided Maternal
MSME HHs MSME HHs
Costs) Affected Dropout Lives Costs) Affected Dropout Lives
Total 14,710 4,139 2,069 (237) 8,739 43,659 39,601 4,044 14 28,949 DF Total 4,611 2,804 368 (8) 1,447 7,142 6,556 583 2 2,531
1 166 166 0 -- 0 0 0 0 0 (166) 0.893 1 0 148 0 -- 0 0 0 0 0 (148)
2 414 414 0 -- 0 0 0 0 0 (414) 0.797 2 330 330 0 -- 0 0 0 0 0 (330)
3 1,242 1,242 0 -- 0 0 0 0 0 (1,242) 0.712 3 884 884 0 -- 0 0 0 0 0 (884)
4 1,863 1,863 0 -- 0 0 0 0 0 (1,863) 0.636 4 1,184 1,184 0 -- 0 0 0 0 0 (1,184)
5 455 455 0 -- 0 0 0 0 0 (455) 0.567 5 258 258 0 -- 0 0 0 0 0 (258)
6 378 -- 83 -- 295 1,369 1,339 29 1 990 0.507 6 192 -- 42 -- 150 693 678 15 0 502
7 382 -- 83 -- 300 1,417 1,357 60 1 1,035 0.452 7 173 -- 37 -- 135 641 614 27 0 468
8 386 -- 83 -- 304 1,467 1,376 91 1 1,080 0.404 8 156 -- 33 -- 123 592 556 37 0 436
9 391 -- 83 -- 308 1,518 1,395 122 1 1,127 0.361 9 141 -- 30 -- 111 547 503 44 0 406
10 395 -- 83 -- 312 1,570 1,414 155 1 1,175 0.322 10 127 -- 27 -- 100 505 455 50 0 378
11 399 -- 83 -- 316 1,590 1,433 157 1 1,191 0.287 11 115 -- 24 -- 91 457 412 45 0 342
12 403 -- 83 -- 321 1,612 1,453 159 1 1,209 0.257 12 104 -- 21 -- 82 414 373 41 0 310
13 408 -- 83 -- 325 1,634 1,473 161 1 1,226 0.229 13 93 -- 19 -- 74 374 337 41 0 281
14 412 -- 83 -- 329 1,658 1,493 165 1 1,246 0.205 14 84 -- 17 -- 67 339 305 34 0 255
15 417 -- 83 -- 334 1,681 1,513 167 1 1,264 0.183 15 76 -- 15 -- 61 307 277 30 0 231
Year Year
16 421 -- 83 -- 339 1,703 1,534 168 1 1,282 0.163 16 69 -- 14 -- 55 278 250 27 0 209
17 426 -- 83 -- 343 1,727 1,556 170 1 1,301 0.146 17 62 -- 12 -- 50 251 227 25 0 189
18 431 -- 83 -- 348 1,749 1,576 172 1 1,319 0.130 18 56 -- 11 -- 45 227 205 22 0 171
19 435 -- 83 -- 353 1,773 1,598 174 1 1,338 0.116 19 51 -- 10 -- 41 206 186 20 0 155
20 440 -- 83 -- 357 1,799 1,620 178 1 1,359 0.104 20 46 -- 9 -- 37 186 168 18 0 141
21 445 -- 83 -- 362 1,823 1,642 180 1 1,378 0.093 21 41 -- 8 -- 34 169 152 17 0 128
22 450 -- 83 -- 367 1,848 1,665 182 1 1,398 0.083 22 37 -- 7 -- 30 153 138 15 0 115
23 455 -- 83 -- 372 1,872 1,688 184 1 1,417 0.074 23 34 -- 6 -- 27 138 125 14 0 105
24 460 -- 83 -- 377 1,899 1,710 188 1 1,439 0.066 24 30 -- 5 -- 25 125 113 12 0 95
25 465 -- 83 -- 383 1,925 1,734 190 1 1,459 0.059 25 27 -- 5 -- 23 113 102 11 0 86
26 471 -- 83 -- 388 1,950 1,757 192 1 1,479 0.053 26 25 -- 4 -- 20 102 92 10 0 78
27 476 -- 83 -- 393 1,978 1,782 196 1 1,502 0.047 27 22 -- 4 -- 18 93 84 9 0 70
28 481 -- 83 -- 399 2,005 1,806 198 1 1,524 0.042 28 20 -- 3 -- 17 84 76 8 0 64
29 487 -- 83 -- 404 2,033 1,831 202 1 1,546 0.037 29 18 -- 3 -- 15 76 68 8 0 58
30 492 -- 83 -- 410 2,060 1,856 204 1 1,805 0.033 30 16 -- 3 -- 14 69 62 7 0 60
Salvage (237) Salvage (8)

ENPV 2,531 (lakh)

EBCR 1.55
EIRR 20.4%

Figure 34. Cash Flows of Economic Costs and Benefits (2) [Rural Infrastructure]

49
3.10. Step VIII: Testing the Sensitivity of the Results to Parameters and
Variables
3.10.1. Conducting Sensitivity Analysis
The eighth step in conducing CBA using the Excel model is to test the sensitivity of
the results to project assumptions and variables. Sensitivity analysis assesses the
impact of changing values of the different assumptions/variables on project outcomes.
The main steps of sensitivity analysis are as follows:

1. Select the project assumptions/variables to which the investment decision

may be sensitive
2. Determine the possible extent of variation of the assumptions/variables
from the base scenario
3. Simulate the effects of different values of these assumptions/variables on
NPV, BCR, and IRR

EXERCISE 16. Simulate the impact of changing values of total benefits on financial and
economic NPV, BCR, and IRR, as follows:

1. Go to Excelʼs 8.Sensitivity sheet and find the “Change in Total Benefits” table
for sensitivity analysis.
2. Clear all the data values except the top row and select the entire circled area
of the table, as shown in Figure 35.

Financial Analysis Economic Analysis

Parameter/Assumption Value
NPV BCR IRR NPV BCR IRR
Change in Total Benefits (%) 100% 16,122 1.01 13.0% 153,295 1.10 21.5%
80%
90%
100%
110%
120%

Figure 35. Sensitivity Analysis (1) [Distribution]

3. In the Excel menu bar, choose the Data tab → What-If Analysis → Data
Table.
4. In the Data Table pop-up box, enter the red-circled “Level of Total Benefits”
cell of “100%” into the Column input cell (see Figure 36).

Level of Total Benefis (%) 100%

Level of Total Costs (%) 100%

Figure 36. Sensitivity Analysis (2)

50
 5. Excel automatically simulates the effects on financial and economic NPV, BCR,
IRR, as shown in Figure 37.

Financial Analysis Economic Analysis

Parameter/Assumption Value
NPV BCR IRR NPV BCR IRR
Change in Total Benefits (%) 100% 16,122 1.01 13.0% 153,295 1.10 21.5%
80% (323,483) 0.81 n/a (169,869) 0.88 n/a
90% (153,680) 0.91 -7.3% (8,287) 0.99 11.4%
100% 16,122 1.01 13.0% 153,295 1.10 21.5%
110% 185,925 1.11 21.9% 314,877 1.22 28.8%
120% 355,727 1.21 28.6% 476,459 1.33 34.8%

Figure 37. Sensitivity Analysis (3) [Distribution]

In a similar manner, sensitivity analysis can be done for total costs and all other
assumptions/variables.

3.11. Step IX: Summarizing the Results of Financial and Economic Analysis
3.11.1. Reporting Financial and Economic NPV, BCR, and IRR
The ninth and final step in conducing CBA using the Excel model is to summarize and
report the results of financial and economic analysis. Excel displays the financial and
economic NPV, BCR, and IRR in the format consistent with the specifications of the
Development Project Proforma/Proposal (DPP) Manual.
Figures 38-40 show a summary of the results of NPV, BCR, and IRR for each of the
sample projects.

Indicator Value
(i) Financial Net Present Value (FNPV) 16,122
(ii) Financial Benefit-Cost Ratio (FBCR) 1.01
(iiI) Financial Internal Rate of Return (FIRR) 13.0%
(i) Economic Net Present Value (ENPV) 153,295
(ii) Economic Benefit-Cost Ratio (EBCR) 1.10
(iii) Economic Internal Rate of Return (EIRR) 21.5%
Figure 38. Summary of the Results [Distribution]

Indicator Value
(i) Financial Net Present Value (FNPV) 2,330
(ii) Financial Benefit-Cost Ratio (FBCR) 1.02
(iiI) Financial Internal Rate of Return (FIRR) 12.2%
(i) Economic Net Present Value (ENPV) 290,903
(ii) Economic Benefit-Cost Ratio (EBCR) 3.54
(iii) Economic Internal Rate of Return (EIRR) 34.3%
Figure 39. Summary of the Results [Transmission]

51
 Indicator Value
(i) Financial Net Present Value (FNPV) (3,781)
(ii) Financial Benefit-Cost Ratio (FBCR) 0.00
(iiI) Financial Internal Rate of Return (FIRR) n/a
(i) Economic Net Present Value (ENPV) 2,531
(ii) Economic Benefit-Cost Ratio (EBCR) 1.55
(iii) Economic Internal Rate of Return (EIRR) 20.4%
Figure 40. Summary of the Results [Rural Infrastructure]

In the end, what is most important in the CBA of public investment projects is that
we all follow the appropriate logic and framework (including reasonable parameters and
assumptions) of the CBA, as well as its analytical process, in a consistent manner.

52
 Reference

ADB (2013) Cost-Benefit Analysis for Development – A Practical Guide

ADB (2017) Guidelines for the Economic Analysis of Projects

European Union (2014) Guide to Cost-Benefit Analysis of Investment Projects

General Economics Division, Planning Commission (2014) Development Project

Proforma/ Proposal (DPP) Manual (Instructions for Preparing Development
Project Proposal

53
54
Annexures

55
56
 Annexure 1

Annexure 1. Description of Power Distribution Project

1. Project Outline (Sheet “0.Contents”)

The project is designed to increase the supply of electricity to about 200,000 new
customers in rapidly growing urban areas and to improve the service of electricity supply
to 100,000 existing customers by establishing new service connections, and updating the
existing distribution facilities, respectively.

The following Table shows the planned outputs of the proposed project.
Outputs Total
Installation of grid substations 2 Nos.
Construction of overhead & underground electricity distribution lines 113.88 Km
Construction of underground transmission lines 66.55 km
Installation of ring main units (RMU) and distribution transformers 2 Nos.

2. Project duration (Sheet “1.Params_8.Sensitivity”)

The estimated construction period of the project is for 5 years. The project life is 30 years.

3. Project Cost (Sheet “2a.FCosts” and “2b.FCosts”)

Direct Cost 1: Investment Cost

The investment cost is the cost to deliver the outputs. The estimated total cost, as an
investment of the project is BDT 237,854 lakh. Here, physical contingency is BDT 4,446
lakh and price contingency is BDT 11,115 lakh.

Item Description BDT (Lakh)***

(a) Revenue* -
(b) Capital 222,294
(c) Physical Contingency** 2% of (b) 4,446
(d) Price Contingency** 5% of (a+b) 11,115
Total (a+b+c+d) 237,854
*To make the model simple, cost for Revenue is not counted.
** The parameter is set in sheet “1.Params_8.Sensitivity”.
*** The total and the sum of a+b+c+d do not exactly match. This is due to rounding to
the nearest whole number.

Table below shows annual initial investment cost excluding the price contingency.

Year 1 Year 2 Year 3 Year 4 Year 5 Total

0.5% 35.6% 39.5% 23.7% 0.6% 100%
1,230 80,626 89,656 53,815 1,413 226,740

57
Direct Cost 2: Operation and maintenance cost
For the cost of operation and maintenance of the facilities developed by the proposed
project, this model assumes BDT 355,342 lakh per annum as the annual operation and
maintenance cost. BDT 355,342 lakh per annum comes from the cost of Input Purchase
(e.g., electricity purchase, wheeling charge) and the cost of Spares & Maintenance. The
Cost of Inputs Purchase is estimated as [total capacity to be increased] X [average cost
of input]. The cost of Spares & Maintenance is assumed to be 1% of the cost of Inputs
Purchase.

The distribution company will purchase electricity from the gridline and will distribute
electricity to its customers using a tariff rate fixed by the Bangladesh Energy Regulatory
Commission.

Indirect cost
No significant indirect costs of the project, such as negative environmental impacts, are
expected.

4. Project Benefit (Sheet “1.Params_8.Sensitivity”, “3.FBenefits”, “6.EBenefits”)

This model considers the following consumerʼs surplus and producerʼs surplus as direct
benefits shown in the Table below.

Category Sub-category Description

Consumerʼs Incremental Additional output of electricity transmitted to
surplus outputs new customers.

Consumerʼs Non-incremental Output of electricity transmitted to existing

surplus outputs customers that displaces unreliable services
of electricity supply with more reliable ones.
Producerʼs Increase in operational revenues
surplus

The proposed project used the following data and information for benefit calculation.
• General Information (Sheet “1.Params_8.Sensitivity”)
- The number of Existing consumers is 100,000 in the project area and additional
200,000 new consumers eventually will be added after completion of the project.
- This project considered the purchase price from BPDB at BDT 6.75 per kWh
including the wheeling charge and the average sales price is BDT 8.05 per kWh.
In addition, it is also considered that Cost of Electricity Production Privately per
kWh is about BDT 12.00, which is a choke price and the wheeling charge is about
BDT 0.29.

58
 - This project is considering the Conversion Factor for traded goods at 1.15.
• Financial Benefit (Sheet “3.FBenefits”)
- This project is targeting to increase the total Capacity about 595 MVA per hour,
and thus 5,212,200 MVA per year. Assuming the system loss is 5.25%, Additional
Supply of Electricity to Meet Demand per year is 4,938,560 MVA/Year.
- Assuming Average Sales Rate per kWh is BDT 8.05 per kWh, Annual Revenues
is BDT 397,554 Lakh.
- Initial Capacity of Utilization after Project Completion is about 80% and annual
Growth in Capacity Utilization/Growth of Demand for Electricity is at 9%.
• Economic Benefit: Incremental Outputs (Sheet “6.EBenefits”)
- Additional Supply of Electricity to Meet Demand per year is 4,938,560 MAV/Year.
- Assuming Average Sales Rate per kWh is BDT 8.05 per kWh, and Cost of
Electricity Produced Privately per kWh is BDT 12.00 per kWh, the difference of
these is BDT 3.95 per kWh.
- Total Annual Incremental Outputs is [Additional Supply of Electricity to Meet
Demand per year] x [The difference], which is BDT 97,537 Lakh.
• Economic Benefit: Non-Incremental outputs (Sheet “6.EBenefits”)
- This project is targeting to reduce the load shedding about 12 minutes per day.
Thus, Reduction in Load Shedding per year is 73 hours per year.
- The number of Existing consumers is 100,000 in the project area.
- Assuming Average Sales Rate per kWh is BDT 8.05 per kWh, and Cost of
Electricity Produced Privately per kWh is BDT 12.00 per kWh, the difference of
these is BDT 3.95 per kWh.
- Total Annual Cost Savings (Reliability Benefits) is [Reduction in Load Shedding
per year] x [The number of Existing consumers] x [The difference], which is BDT
288 Lakh.
• Economic Benefit: Increase in operational revenues (Sheet “6.EBenefits”)
- Financial benefit: BDT 397,544 lakh per year is converted into Economic Benefit:
BDT 345,699 lakh per year using the Conversion Factor for traded goods at 1.15.

Note: The sample model in this Handbook is only a template for CBA calculations, and is
intended to show how to carry out a CBA step by step. As the actual values of the project
assumptions and variables to be used for a particular project will vary from project to
project, their estimated values must ultimately be obtained from project-specific data
sources, such as the projectʼs feasibility study.

59
60
 Annexure 2

Annexure 2. Description of Power Transmission Project

1. Project Outline (Sheet “0.Contents”)

The project is designed to ensure uninterrupted and reliable power transmission for some
economic zones in XXX Division and for XXX Hi-Tech City in XXX District and to meet the
growing demand of electricity in the southern areas of XXX Division by constructing new
substations and expansion of transmission facilities in the project area.

The following Table shows the planned outputs of the proposed project.
Outputs Total
Construction of 230 kV GIS grid substation 2 Nos.
Construction of 132 kV GIS grid substations 2 Nos.
Construction of 230 kV transmission lines 113.88 Km
Construction of 132 kV transmission lines 66.55 km
Extensions of 230 kV GIS bay at the existing XXX substation 2 Nos.

2. Project duration (Sheet “1.Params_8.Sensitivity”)

The estimated construction period of the project is for 6 years. The project life is 30 years.

3. Project Cost (Sheet “2a.FCosts” and “2b.FCosts”)

Direct Cost 1: Investment Cost

The investment cost is the cost to deliver the outputs. The estimated total cost, as an
investment of the project is Tk. 200,816 lakh. Here, physical contingency is Tk. 3,753
lakh and price contingency is Tk. 9,384 lakh.

Item Description Taka (Lakh)

(e) Revenue* -
(f) Capital 187,679
(g) Physical Contingency** 2% of (b) 3,753
(h) Price Contingency** 5% of (a+b) 9,384
Total (a+b+c+d) 200,816
*To make the model simple, cost for Revenue is not counted.
** The parameter is set in sheet “1.Params_8.Sensitivity”.

Table below shows annual initial investment cost excluding the price contingency.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Total

8.6% 15.5% 25.7% 21.5% 18.2% 10.4% 100%
16,516 29,766 49,271 41,189 34,803 19,887 191,433

Direct Cost 2: Operation and maintenance cost

For the cost of operation and maintenance of the facilities developed by the proposed

61
project, this model assumes Tk. 496 lakh per annum as the annual operation and
maintenance cost, which is taken from a similar type of the existing substation of the
transmission company.

Indirect cost
No significant indirect costs of the project, such as negative environmental impacts, are
expected.

4. Project Benefit (Sheet “1.Params_8.Sensitivity”)

This model considers the following consumerʼs surplus and producerʼs surplus as direct
benefits shown in the Table below.

Category Sub-category Description

Consumerʼs Incremental Additional output of electricity transmitted to
surplus outputs new customers.
Consumerʼs Non-incremental Output of electricity transmitted to existing
surplus outputs customers that displaces unreliable services
of electricity supply with more reliable ones.
Producerʼs Increase in operational revenues
surplus

This model assumes that from the fourth year, electricity will be partially transmitted.

5. Assumptions and variables used in the model (Sheet “1.Params_8.Sensitivity)

To capture the costs and benefits described in sections 3 and 4 above, the model used
the following assumptions and variables.

• General Information
- This project is considering the Conversion Factor for traded goods at 1.15.
• Financial Benefit (Sheet “3.FBenefits”)
- This project is targeting to increase the total Capacity about 1,398.63 MWA per
hour.
- Considering Load Factor is 90.0%, Gross Annual Energy (considering the Load
Factor) is [Incremental Load Flow/Total Capacity to be Increased] x [Load
Factor], which is 11,026.80 mil.kWh/year.
- Considering Transmission Loss is 2.77%, Wheeled Energy/Additional Supply of
Electricity to Meet Demand is [Gross Annual Energy (considering the Load
Factor)] x [Transmission Loss], which is 10,721.36 mil.kWh/year.
• Considering Wheeling Charge is BDT 0.2791 per kWh, Revenues from Wheeling
Charge is [Wheeled Energy/Additional Supply of Electricity to Meet Demand] x
[Wheeling Charge], which is 29,923.31 Lakh BDT.

62
 • Economic Benefit: Increment Outputs (Sheet “6.EBenefits”)
- Percent of Electricity Transmitted to Residential and Commercial Customers is
61.82% and 39.18%, respectively.
- Residential Consumer: Wheeled Energy/Additional Supply of Electricity to Meet
Demand for Residential Consumer is [Wheeled Energy/Additional Supply of
Electricity to Meet Demand] x [Percent of Electricity Transmitted to Residential
Customers], which is 6,521 mil.kWh/year. Considering Average Sales Rate for
Residential Consumers is BDT 7.49 per kWh, and Cost of Electricity Produced
Privately for Residential is BDT 12.00 per kWh, the difference between them is
BDT 4.51 per kWh. Annual Incremental Outputs for Residential Consumer is
[Wheeled Energy/Additional Supply of Electricity to Meet Demand for Residential
Consumer] x [the difference] x 0.5, which is 147,042 Lakh BDT.
- Commercial Consumer: Wheeled Energy/Additional Supply of Electricity to Meet
Demand for Commercial Consumer is [Wheeled Energy/Additional Supply of
Electricity to Meet Demand] x [Percent of Electricity Transmitted to Commercial
Customers], which is 4,201 mil.kWh/year. Considering Average Sales Rate for
Commercial Consumers is BDT 9.80 per kWh, and Cost of Electricity Produced
Privately for Commercial is BDT 12.00 per kWh, the difference between them is
BDT 2.20 per kWh. Annual Incremental Outputs for Commercial Consumer is
[Wheeled Energy/Additional Supply of Electricity to Meet Demand for
Commercial Consumer] x [the difference] x 0.5, which is 46,207 Lakh BDT.
• Economic Benefit: Non-Incremental outputs (Sheet “6.EBenefits”)
- The number of Existing Total Customers is 1,332,805. Assuming the Percent of
Existing Total Customers who Benefit from Cost Savings is 1 % and the Average
Cost Savings per Customer is 1,000 BDT per Year, Total Annual Cost Savings
(Reliability Benefits) is [The number of Existing Total Customers] x [the Percent
of Existing Total Customers who Benefit from Cost Savings] x [the Average Cost
Savings per Customer], which is 133 Lakh BDT.
• Economic Benefit: Increase in operational revenues (Sheet “6.EBenefits”)
- Financial benefit: 29,923 lakh BDT per year is converted into Economic Benefit:
26,020 lakh BDT per year using the Conversion Factor for traded goods at 1.15.

Note: The sample model in this Handbook is only a template for CBA calculations, and is
intended to show how to carry out a CBA step by step. As the actual values of the project
assumptions and variables to be used for a particular project will vary from project to
project, their estimated values must ultimately be obtained from project-specific data
sources, such as the projectʼs feasibility study.

63
64
 Annexure 3

Annexure 3. Description of Rural Infrastructure Development Project

1. Project Outline (Sheet “0.Contents”)

The objectives of the project are to enhance the economic activities and improve access
to education and healthcare service for the of the people living in 100 square kilometer
area of the project area by connecting the rural people with proposed road network,
including improved growth centers/ markets/ ghat.

The following Table shows the planned outputs of the proposed project.
Outputs Total
Construction of Union Road 50.50 km
Construction of Village Road 100.00 km
Rehabilitation of Village Road 150.00 km
Construction of Bridges/ Culverts 500 meters
Construction of Growth Center Market (GCM) construction 25 Nos.
Construction of Ghat 10 Nos.

2. Project duration (Sheet “1.Params_8.Sensitivity”)

The estimated construction period of the project is for 5 years. The project life is 30 years.

3. Project Cost (Sheet “2a.FCosts” and “2b.FCosts”)

Direct Cost 1: Investment Cost

The investment cost is the cost to deliver the outputs. The estimated total cost, as an
investment of the project is BDT 5,188 lakh. Here, physical contingency is BDT 97 lakh
and price contingency is BDT 242 lakh.

Item Description BDT (Lakh)

(i) Revenue* -
(j) Capital 4,849
(k) Physical Contingency** 2% of (b) 97
(l) Price Contingency** 5% of (a+b) 242
Total (a+b+c+d) 5,188
*To make the model simple, cost for Revenue is not counted.
** The parameter is set in sheet “1.Params_8.Sensitivity”.

Table below shows annual initial investment cost excluding the price contingency.

Year 1 Year 2 Year 3 Year 4 Year 5 Total

4% 10% 30% 45% 11% 100%
198 495 1,484 2,226 544 4,946

65
Direct Cost 2: Operation and maintenance cost
As the cost of operation and maintenance of the facilities developed by the proposed
project, this model assumes that 2% of the total initial investment amount is required
every year to maintain the road network and other facilities associated with the project.
Thus, BDT 99 lakh per annum is taken as the annual operation and maintenance cost.

Indirect cost
The indirect costs in the form of a decrease in income/welfare loss/external cost are also
expected for some segment of population.

4. Project Benefit (Sheet “1.Params_8.Sensitivity”, “6.EBenefits”)

This model considers the indirect benefits show in the Table below, because the model
assumes that no consumerʼs surplus and producerʼs surplus can be calculated here as the
14 15
project outputs are not transacted in markets.

Category Description
Commercial Agricultural and Micro, Small and Medium Enterprise (MSME)
benefits households will enjoy higher demands of their products and services
owning to improved access to markets and distribution channels.
Educational For young citizens, who will get benefitted by not dropping out of
benefits school and finish high school education owning to improved and easy
access to schools.
Health For the pregnant women, whose lives will be saved owning to
benefits
improved access to maternal health services.

The proposed project used the following data and information for benefit calculation.

• General Information (Sheet “1.Params_8.Sensitivity”, “6.EBenefits”)

- Nearly 35,000 people will be benefitted through this project. Average Household
size for both project area and negatively affected area is 5.2. Thus, the number
of households in the project areas is 6731.

14
Note that for non-revenue-generating projects, neither incremental outputs nor non-incremental
outputs usually can be calculated, as the project outputs are not transacted in markets. In that case,
project benefits must be measured either by estimating consumersʼ willingness to pay (WTP) for the
project outputs (using stated or revealed preference methods) or by estimating the indirect impact of
the project outputs on the economic welfare of the society (i.e., indirect benefits).
15
In case of road projects, travel time and cost saving is commonly used as economic benefit. To capture
this benefit, surveys are often required. Some Rural Infrastructure Development Projects include not
only road construction but also market construction and others, so counting only travel time and cost
saving as economic benefit results may underestimate the results of economic analysis.

66
 - Annual Population growth rate for both project area and negatively affected area
is 1.37%
- Population in negatively affected area is 1300 people.
• Commercial benefits (Agriculture) (Sheet “6.EBenefits”)
- Approximately 45% of all households, or 3,029 households, are dependent on
agricultural income.
- Average monthly income for agricultural households is BDT 12,000 per month.
- Total Annual Income for Agricultural Households is [The number of agricultural
households] x [Average monthly income for agricultural households] X 12month,
which is BDT 4,361.76 Lakh.
- It is expected that because of improved condition, rural households engaged in
agricultural activities will also see a rise of their income by 20% per year.
- Increase in Total Annual Income for Agricultural Households is [Total Annual
Income for Agricultural Households] X [Increase in Agricultural Income], which
is BDT 933.70 Lakh in year 6, considering the Annual Population growth rate.
• Commercial benefits (MSME) (Sheet “6.EBenefits”)
- Approximately 7.5% of all households, or 505 households, are dependent on
Micro, Small and Medium Enterprise (MSME) income.
- Average monthly income for MSME households is BDT 25,000 per month.
- Total Annual Income for MSME Households is [The number of MSME households]
x [Average monthly income for MSME households] X 12month, which is BDT
1,515.00 Lakh.
- It is expected that because of improved condition, rural households engaged in
MSME will also see a rise of their income by 25% per year.
- Increase in Total Annual Income for MSME Households is [Total Annual Income
for Agricultural Households] X [Increase in MSME Income], which is BDT 405.00
Lakh in year 6, considering the Annual Population growth rate.
• Education Benefit (Sheet “6.EBenefits”)
- Nearly 20% of the population, or 7,000 persons are high school going and that
10% of them or 700 persons dropped out from education and among them 10%
of student dropout will be reduced due to the intervention of the project.
- Increase in Personal Income due to reduced High School Dropout is USD 209,000
for life, which is equivalent to BDT 195,923, by considering working life of a
person: 35 years and using PPP exchange rate: BDT 32.81 per USD. (PPP
exchange rate is used because a reasonably reliable estimate on personal income
was available only in USD from a US study.)
- Increase in Total Annual Income for Those Who Avoided Dropout is [Reduction
in Student Dropouts] x [Increase in Personal Income due to Avoidance of

67
 Dropout]. Assuming 20% of the program benefits materialized and considering
the Annual Population growth rate, Increase in Total Annual Income for Those
Who Avoided Dropout in year 6 is BDT 29.39 Lakh.
• Health Benefits
- Percentage of Female Population in the project area is 50%, or 17,500 persons,
and among them, Percentage of Female aged between 15 to 44 years is around
50% or 8,750 persons.
- It is assumed that 8% of the female population of the project area, or 700
persons are experiencing complicated pregnancy cases per year. (or Women
Giving Birth per year)
- Maternal Mortality in the project area is considered 173 deaths per 100,000
births. Thus, maternal death in Year 1 is 1.
- Due to better communication to health facilities, the project assumes that the
maternal mortality will be dropped by 70% in the project area.
- Total Statistical Value of Life in Bangladesh is BDT 1,909,355 per life, or BDT
54,553 per year, considering working life of a person: 35 years.
- Total Value Obtained from Saving Maternal Lives is [Annual Statistical Value of
Life in Bangladesh] x [Reduction in Maternal Deaths], which is BDT 0.55 lakh in
year 6, considering the Annual Population growth rate.

The model refers to the following source of information to set the assumptions.
 Increase in personal income due to avoidance of dropout
(https://academiccommons.columbia.edu/doi/10.7916/D8CF9QG9)
 Purchasing power parity (PPP)
(https://data.worldbank.org/indicator//PA.NUS.PPP?locations=BD)
 Health cost saved due to delivery
(https://onlinelibrary.wiley.com/doi/full/10.1111/mcn.13098)

Note: The sample model in this Handbook is only a template for CBA calculations, and is
intended to show how to carry out a CBA step by step. As the actual values of the project
assumptions and variables to be used for a particular project will vary from project to
project, their estimated values must ultimately be obtained from project-specific data
sources, such as the projectʼs feasibility study.

68