The purpose of this course is to develop a sound understanding of the basic tools of financial and economics analysis of projects and the theoretical framework for modern cost benefit analysis (CBA). The broad purpose of CBA is to help project evaluation and social decision making. More specifically, the objective is to facilitate the more efficient allocation of society’s resources. Emphasis will be placed on hand-on learning experience, and applications in the context of developing countries.

IDEC Graduate Diploma students should be enrolled under the course code IDEC8001. IDEC Masters students should be enrolled under the course code IDEC8088. Part of the assessment will be different for the two groups. See ‘Indicative Assessment’. Non-IDEC students should seek advice from their own area which course code they should enroll in.

Students would understand how and why CBA can be used to appraise projects with an objective to improve social welfare.

There will be tutorial exercises, assignments, two quizzes, a mid-term test and a final examination. Tutorial exercises and assignments are particularly focus on the practical application.

Tutorial exercises are assigned whenever is appropriate. The aim is to provide students hand-on experiences in using spreadsheets for actual cost benefit calculations. Some tutorial exercises are required to be submitted and are counted as part of the assessment. They should be submitted via email (AND cc. to me) to the tutor who is in-charge of the tutorial session that you sign up for. They should NOT be submitted via Wattle.

 They will count towards the grade as follows:

             Assignments               15%                                          

            Mid-term                     20%                                                                            

            Quizzes                      10%

     Final exam                 55%    

 Graduate Diploma students are allowed to choose from a given set of questions in the final examination, while Masters students are not given any choice.

Three and a half contact hours per week, including 2.5 lecture hours and one hour tutorial.  Consultation is by appointment. On average, students are expected to spend five to six hours outside of contact hours to complete the course.

Students with non-economics backgrounds are encouraged to consult the lecturer-in-charge regarding eligibility and assumed knowledge for the course.

Introductory microeconomics. Students not majoring in economics should discuss with the lecturer before enrolling.

Perkins, F.C. (1994). Practical Cost Benefit Analysis: Basic Concepts and Applications. Macmillan, Melbourne.

Boardman, A.E. et al. (2006). Cost Benefit Analysis - Concepts and Practices, Third Edition, Prentice Hall, NJ.

Sinden, J.A. and Thampapillai, D.J. (1995). Introduction to Cost Benefit Analysis, Longman, Melbourne.

Campell, H. and R. Brown (2003). Benefit-Cost Analysis: Financial and Economic Appraisal Using Spreadsheets, Cambridge.

Nas, T.F. (1996). Cost Benefit Analysis - Theory and Application. Sage, California.

Zerbe, R.O. and A.S. Bellas (2006). A Primer for Benefit-Cost Analysis, Edward Elgar Publishing.

Department of Transport and Regional Services (2005). Report 110: Risk in Cost-Benefit Analysis, Bureau of Transport and Regional Economics, Commonwealth of Australia. [Downloadable: http://www.btre.gov.au/info.aspx?ResourceId=25&NodeId=22]

Dinwiddy, C.L. (1996). Principles of Cost-Benefit Analysis for Developing Countries, Cambridge University Press.

Zerbe, R.O. and Dively, D.D. (1994). Benefit Cost Analysis in Theory and Practice, Harper Collins, NY.

Australia Department of Finance. (2006). Handbook of Cost-Benefit Analysis, Australian Publishing Service, Canberra.      

[Downloadable:http://www.finance.gov.au/publications/finance-circulars/2006/docs/

Handbook_of_CB_analysis.pdf]

Jenkins, G.P. and Harberger, A.C. (1991). Program on Investment Appraisal and Management Manual - Cost Benefit Analysis of Investment Decisions, Cambridge, Mass., Harvard Institute for International Development.

Gramlich, E. (1997). A Guide to Benefit-Cost Analysis, Waveland Publishing, NJ.

Hanley, N. and C. L. Spash (1998). Cost-benefit analysis and the environment, Edward Elgar.

Little, I.M.D. and Mirrlees, J.A. (1974). Project Appraisal and Planning for Developing Countries, London, Heinemann Educational Books.

Pearce, D.W. and Nash, C.A. (1981). The Social Appraisal of Projects: A Text in Cost Benefit Analysis, Macmillan, London.

Sassone, P.G. (1978). Cost-Benefit Analysis: A Handbook, Academic Publisher.

UNIDO (1972). Guidelines for Project Evaluation, New York, United Nations.

Delivery Mode:

The course will be delivered "on campus" with materials posted in Wattle.

Course Structure:

1. Overview

• Introduction to CBA
• The role and objective of financial and economic analyses of projects
• Individual versus social welfare

2. The valuation of financial costs and benefits

• When to undertake financial analysis
• A primer on welfare economic concepts
• Market prices as a measure of economic value
• The valuation of project cash flow
• The valuation of project costs

3. Time preference, discounting and discounted project selection criteria

• Time preference
• Comparing projects with different time frames: discounting
• Real or nominal discount rate
• Discounted project selection criteria
• Non-discounted project selection criteria

4. The rationale for economic cost benefit analysis

• Neoclassical theory
• Market failure
• Government intervention
• Shadow versus economic prices

5. Identification of benefits and costs

• Some rules of thumbs
• Secondary markets

6. Economic valuation in a closed economy

• Measuring changes in economic welfare: consumer and producer surplus
• Economic or shadow pricing
• Measuring economic benefits and costs of project with no distortion
• Measuring economic benefits and costs with distortions

7. Economic valuation of tradeables

• Traded versus non-traded goods
• Valuation of tradeables whose price will not change as a result of the project
• Valuation of tradeables whose price will change as a result of the project
• Valuation of tradeables in an economy with distortion
• Potentially traded goods

8. Economic valuation of foreign exchange

• The premium on foreign exchange
• The shadow exchange rate
• Two approaches in valuating traded good with foreign exchange premium

9. Economic valuation of primary factors - labour, land and natural resources

• Labour as a non-traded factor in fixed supply
• Labour market in developing countries
• A common shadow wage rate formula
• Shadow price of land
• Shadow price of natural resources

10. Public goods and social services

• Definition of public goods
• The valuation of public goods
• Applying CBA to environmental issues
  • Relevance of CBA to environmental management
  • Example of the valuation of externalities
  • Treatment of non-renewable resources
  • Problems with CBA

 11. Social discount rate

• Social discount rate with no distortions
• Social discount rate with distortions
• Social discount rate as the weighted cost of capital
• The decision-maker approach to social discount rate

 12. Social cost benefit analysis

• Purpose
• Distributional weights
• Various approaches to social cost benefit analysis

 13. Handling risk and uncertainty

• Sources of uncertainty in project appraisal
• Risk and uncertainty
• Sensitivity analysis
• Incorporating uncertainty in CBA

 14.  Limitations and pre-conditions of a good use of CBA

 15. Overview and conclusions