Question

1. How should the following items be dealt with in CBA:

1. land
2. capital items such as plant and equipment
3. financing expenses associated with the project
4. depreciation of plant and equipment
5. allowances for bad debts
6. working capital
7. salvage value
8. external benefits and costs

2. Which methods are used to compare projects at different time frames?

3. What are the strengths and weaknesses of each of the criteria (NPVs, benefit/cost ratio, internal rates of return, net terminal values) that use discounted net social benefits?

4. What is the usual practice followed by CBA researchers when reporting their results in terms on discounted NSBs?

Notice: please answer each question brief and clear.

Answer 1

1.a. The appreciation in the land price over the years should be considered as a benefit

b. The financing expenses associated with the project should be considered as cost

c. Depreciation of plant is not an actual cash outflow, but should be considered as cost for accounting purposes

d. allowances for bad debt should be considered as a cost

e. salvage value should be considered as a benefit at the end of the project

f. working capital will be a cash outflow at the beginning of the project and the same will be recovered at the end of the project. So, the net effect on CBA is nil

g. external benefits and costs should be treated as a benefit or a cost as the case may be

2. The methods used are: NPV (Net present value), IRR (Internal Rate of return), MIRR (Modified IRR), Payback, discounted payback, profitability index.

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