exchange rate 2

Question 1

While an expected positive economic return is a necessary condition for recommending that a project be undertaken, it is by no means a sufficient reason for a successful outcome. A project with a high expected economic return may fail if

Answer 1

there are not enough funds to finance the operations of the project.

Question 2

Water supply projects are typical examples of projects that generate X due to the large economic value attached to water but receive
little financial revenues because of the Y.

Answer 2

substantial economic benefits, low water tariffs.

Other examples include projects such as public transport and irrigation where services
are usually provided at concessional prices.

Question 3

A key objective of a financial appraisal for a government project is to determine whether

Answer 3

the project can continue “to pay its bills” throughout its entire life; and if not, how can the shortfalls be
met.

Question 4

Although the government’s decision to provide grants or loans for these activities should be based on whether all small investors undertaking the project yields positive economic returns or not, the government will need to also determine if

Answer 4

the projects are financially sustainable.

Question 5

The difference between the X that a project faces and

the Y required by the project measures the tax gain to the government.

Answer 5

financial price (inclusive of tax), economic cost of an input

Question 6

Gains and losses of this nature will be difficult to establish on the basis of

Answer 6

economic analysis alone

Question 7

A central piece of the financial appraisal.

Answer 7

The financial cash flow of an investment project

Question 8

The cash flow statement of a project is a listing of all .

Answer 8

anticipated sources of cash and uses of cash by the business over the life of the project

Question 9

project’s life.

Answer 9

the difference between receipts and expenditures against the sequence of years

Question 10

The net cash flow profile

Answer 10

measured by the difference between receipts and expenditures.

Question 11

net cash flow (positive or negative?)

Answer 11

is usually negative in the beginning of a project’s life

when the investment is being made

Question 12

Some projects may also experience negative cash flows occasionally after the initial investment has been made

Answer 12

which require significant investments to be made at intervals throughout the life of a project such as the re-tooling of a factory.

Question 13

Some projects may also experience negative cash flows occasionally after the initial investment has been made 2

Answer 13

if they are producing a good or service which experiences wide swings in price or demand

Question 14

Some other projects will even have negative cash flows in the final years of the project’s life

Answer 14

as costs are incurred to rehabilitate the project site or to compensate workers for their displacement

Question 15

The investment plan consists of two sections:

Answer 15

the first section deals with the expenditure on new acquisitions, and the opportunity cost of existing
assets,

and the second section deals with the financing aspects of the proposed investment

Question 16

The investment plan will contain a listing of all the expenditures to be undertaken up to the point where the

Answer 16

facility is ready to begin its normal operations.

Question 17

every expenditure should be broken down into two parts:

Answer 17

first, the amount spent on goods and services traded internationally, and second domestically

Question 18

These categories of expenditures are in turn divided into the

Answer 18

1) payments received by the suppliers of these goods,

2) payments to the government (such as tariffs, value
added taxes, etc.),

3) subsidies received from the government, and
4) subsidies for the purchase of the investment items.

Question 19

Expenditures on labor for the construction of the project should be identified by

Answer 19

year and by skill level

Question 20

Why expenditures on labor for the construction of the project should be identified by year and by skill level?

Answer 20

for providing a clear understanding of its 1. cost structure and 2. determining if there is a likely shortage of skilled workers. 3. estimating the respective shadow price of labour in the economic analysis of
the project

Question 21

depreciation expense is not

Answer 21

a cash outflow and thus should not be included in the financial cash flow profile of the project.

Question 22

The full capital costs of an investment are accounted for in the financial cash flow profile since the amount of the investment expenditures are deducted in the year they occur. If any further capital charge, such as depreciation expense, were deducted from the cash flow profile,

Answer 22

it would result in a double-counting of the investment opportunity cost of existing assets.

Question 23

If the project under consideration is an ongoing concern or a rehabilitation project where some of the project’s old assets are integrated into the proposed facilities,

Answer 23

the opportunity cost of these assets should be included in the cash flow statement together with the expenditure on new acquisitions

Question 24

The opportunity cost of using an asset in a specific project is

Answer 24

the benefit foregone by not putting the asset to its best alternative use.

Question 25

To measure the opportunity cost of an asset, a monetary value has to be assigned to it in such a way that

Answer 25

should be equal to what has been sacrificed by using it in the project rather than in its next best use.

Question 26

the value of an asset is treated as a sunk cost if the asset has

Answer 26

no alternative use.

Question 27

The opportunity cost of the existing assets is generally included in the

Answer 27

the first year of the project’s cash flow profile because the assets could be sold at that time if the project is not feasible.

Question 28

The in-use value of the asset is what

Answer 28

it would sell for if it were to be used as an ongoing concern.

it is generally estimated at a use that is less than highest-and-best use, and therefore it is generally lower than market value.

Question 29

The financial opportunity cost of an existing asset

Answer 29

is the highest financial price that it could be sold for.

Question 30

The highest financial price is typically the higher of the

Answer 30

in-use value of the asset and its liquidation value

Question 31

The liquidation value is what the asset would sell for

Answer 31

if broken into its different components and sold in parts.

Question 32

The costs of installing machine and equipment, as well as their liquidation cost, are further deducted in order to

Answer 32

derive the net liquidation value of the assets.

Question 33

When considering the opportunity cost of any production plant,

Answer 33

one should consider the in-use value of the plant if it continues to be operated as it is.

Question 34

The most appropriate way to determine in-use and liquidation values is through reliable

Answer 34

market assessors

remember to the assessors’ and sales agency’s fees caculated

Question 35

An approach to preparing an estimate of the in-use value of a set of assets is to consider their

Answer 35

net replacement costs

Question 36

The net replacement cost is the amount of

Answer 36

expenditures that would have made today to build a facility that would provide the same amount of services in the future as would the assets that are now being evaluated

Question 37

To estimate the net replacement value of an asset, two adjustments must be made to the historical purchase cost of assets.

Answer 37

The first adjustment is for the change in the nominal prices of new assets or the same type of asset can perform the same function as the asset being evaluated.

The second parameter needed to estimate an asset’s net replacement cost is the amount of economic depreciation that the asset has experienced since it was purchased.

Question 38

The economic depreciation rate for an asset reflects the

Answer 38

loss in the market value of the asset, which is generally different from the depreciation rate used for tax purposes

Question 39

opportunity cost

Answer 39

The purchase price of an asset adjusted for inflation and net of the cumulative amount of economic depreciation over years since it was purchased represents the opportunity cost of the asset if it is used over its remaining lifetime in a project.

Question 40

(Net replacement value)t or in-use value

Answer 40

A0 * (1 – Proportion of Asset Depreciated dt) * (It / Ih)