Project Financial Analysis Basics

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Questions and Answers

In project analysis, how are costs and benefits defined?

Costs are anything that reduces achievement of an objective, and benefits are anything that contributes to an objective. (correct)

Costs are anything that maximizes net income, and benefits are anything that diversifies activities to reduce risk.

Costs are anything that reduces the available labor force for farm work, and benefits are anything that forces the farmer to continue growing a traditional variety.

Costs are anything that contributes to an objective, and benefits are anything that reduces achievement of an objective.

What may be a major objective for a private business firm or government corporation?

Diversifying activities to reduce risk

Reducing unemployment

Maximizing net income (correct)

Increasing national income

What may lead to the choice of a project in project analysis?

Contributing to income distribution (correct)

Raising the level of education

Maintaining services even in less densely populated areas or at off-peak hours

Increasing regional integration

What is the primary objective of a farmer participating in a project, according to the text?

Maximizing family income Signup and view all the answers

For a private business firm or government corporation, which objective is emphasized in addition to maximizing net income, as per the text?

Reducing unemployment Signup and view all the answers

What may lead to the choice of a project in project analysis, according to the text?

Increasing regional integration Signup and view all the answers

In project analysis, what is considered a cost according to the text?

Anything that reduces achievement of an objective Signup and view all the answers

What is one of the additional objectives for a society as a whole mentioned in the text?

Income distribution Signup and view all the answers

In project analysis, what is the primary focus when examining costs?

Whether the item reduces the net benefit or net income of a firm Signup and view all the answers

What is one widely accepted efficiency measure mentioned in the text?

The actual or potential value of a project as an import or export Signup and view all the answers

What are the critical problems in determining the relevant alternative project, according to the text?

The technology used and the length of time required to phase out the project Signup and view all the answers

What represents a minimum measure of what people are willing to pay for a unit of service produced by the project at each level of output demanded?

The competitive demand price Signup and view all the answers

What is useful to distinguish between in the process of calculating costs and benefits?

Enumeration and profitability Signup and view all the answers

Study Notes

Project Analysis

A project must be analyzed in terms of its timely implementation and financing.

Financial Analysis

Financial analysis of a project reviews it from the angle of the private or public entity responsible for its execution.
It aims to verify, under prevailing market conditions, if a project will become and remain viable.
Comprehensive financial analysis provides the basic data needed for economic evaluation of the project.

When to Undertake Financial Analysis

A financial analysis must be undertaken when it is necessary to determine the financial profitability of a project to the project implementer.
Private firms primarily undertake financial analysis of projects they are considering, and seldom undertake economic analysis.
Commercially oriented government authorities usually undertake both financial and economic analysis of projects.

Objectives of Project Analysis

Maximization of income is often taken as the dominant objective of a firm.
Increased national income is the most important objective of national economic policy.
Anything that reduces national income is a cost, and anything that increases national income is a benefit.

Economic Analysis

The task of the economic analyst is to estimate the amount of increase in national income available to society.
The analyst determines whether, and by how much, the benefits exceed the costs in terms of national income.

Quantification of Costs and Benefits

Once costs and benefits are enumerated, the next step is accurate prediction of future benefits and costs.
Quantification involves the quantitative assessment of both physical quantities and prices over the life span of the project.
Financial analysis of projects is typically based on accurate prediction of market prices, on top of quantity prediction.

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Description

Test your knowledge of the fundamental concepts and principles of financial analysis for project evaluation. Explore the key aspects of reviewing projects from the perspective of timely implementation, financing, and market conditions.