Accounting period - The interval between successive entries in an account. In project

analysis, the accounting period is generally a year, but it could be any other convenient time

period.

Accounting prices - Equilibrium prices that are generally different from actual market prices

and from regulated tariffs. They should be used in project appraisal to reflect better the real

costs of inputs to society, and the real benefits of the outputs, than actual prices do. They

are used in the economic analysis to better reflect the real costs of inputs to society, and the

real benefits of the outputs. Often used as a synonym of shadow prices.

Appraisal - The ex-ante analysis of a proposed investment project to determine its merit and

acceptability in accordance with established decision-making criteria.

Base case - A statement of what would have happened in the absence of the project or

programme.

Benefit-cost ratio - The net present value of project benefits divided by the net present

value of project costs. A project is accepted if the benefit-cost ratio is equal to or greater

than one. It is used to accept independent projects, but it may give incorrect rankings and

often cannot be used for choosing among mutually exclusive alternatives.

Beta - A measure of market risk of a stock or a portfolio of stocks. Stocks are assessed as

low risk or high risk by reference to the beta of the market portfolio, which is one.

Business as usual scenario - A reference scenario which assumes that future evolution is an

extension of the current trends. See also do nothing scenario.

Cost of capital - Calculated as a weighted average of the interest costs of debt and equity

capital. Equity funds include both capital stock (common and preferred stock) and retained

earnings. Costs of capital are usually expressed as annual percentage rates.

Constant prices - Prices related to a base year in order to exclude inflation from economic

data. Prices that have been deflated by an appropriate price index based on prices prevailing

in a given base year.

Consumers surplus - The value consumers receive over and above what they actually have

to pay.

Consumption tax - Taxes levied on the consumption of goods and services. Indirect taxes on

consumption include excise duties, wholesale or retail sales taxes, value-added taxes, or

other taxes on intermediate transactions. Consumption taxes form a wedge between the

price paid by the purchaser and the price received by the supplier. For any good or service,

the demand price is the market price plus consumption taxes and less consumption

subsidies.

Cost-Benefit Analysis - A procedure for evaluating the desirability of a project by weighting

benefits against costs. CBA usually implies the use of accounting prices. Cost-benefit analysis

differs from a straightforward financial appraisal in that it considers all gains (benefits) and

losses (costs) to social agents. Results may be expressed in many ways, including internal

rate of return, net present value and benefit cost ratio.

Cost/effectiveness - The ratio between physical results and costs in money terms incurred in

getting these results.

Cost/effectiveness analysis - CEA is an appraisal and monitoring technique used when

benefits cannot be reasonably measured in money terms. It is usually carried out by

calculating the cost per unit of non monetised benefit and is required to quantify benefits

but not to attach a monetary price or economic value to the benefits.

Constant prices - Prices at a base year in order to exclude inflation from economic data.

They may refer either to market prices or shadow prices. They should be distinguished from

current prices.

Current prices - Prices as actually observed at a given time.

Cut-off rate - The rate below which a project is considered unacceptable. It is often taken to

be the opportunity cost of capital. The cut-off rate would be the minimum acceptable

internal rate of return for a project or the discount rate used to calculate the net present

value, the net-benefit investment ratio, or the benefit-cost ratio.

Debt-equity ratio (Gearing) - Measure used in the analysis of financial statements to show

the amount of protection available to creditors. The ratio equals long-term debt divided by

total shareholder equity. Generally the higher the ratio, the higher the financial risk.

Depreciation - Reduction in the value of an asset, generally from wear and tear, over time.

See also Residual value. Depreciation reduces taxable income but is not an actual cash flow.

Discount rate - The rate at which future values are discounted to the present. Financial

discount rate and economic rate may differ, in the same way that market prices may differ

from accounting prices.

Discounting - The process of adjusting the future value of a cost or benefit to the present by

a discount rate, i.e. by multiplying the future value by a coefficient that decreases with time.

Distortion - A mechanism that generates a gap between the opportunity cost of a good and

its actual price, e.g. monopoly pricing, externalities, indirect taxes, duties, regulated tariffs,

etc. A state in which the market pri- ce of an item differs from the price it would bring in the

absence of government policy failures or market failures. This generates a gap between the

opportunity cost of a good and its actual price, e.g. monopoly pricing, externalities, indirect

taxes, duties, regula- ted tariffs, etc.

Dividend - Distribution of earnings paid to stockholders based on the number of shares they

own. The most typical type is cash, but dividends may also be issued in such forms as stock

and property.

Do-minimum The project option that includes all the necessary realistic level of

maintenance costs and a minimum amount of investment costs or necessary improvements,

in order to avoid or delay serious deterioration or to comply with safety standards.

Do nothing - The baseline scenario, business as usual, against which the additional benefits

and costs of the with project scenario can be measured (often a synonym for the without

project scenario).

Do-something - The scenario(s) in which investment projects are considered, different from

do nothing and do- minimum, see above.

Economic analysis - Analysis that is undertaken using economic values, reflecting the values

that society would be willing to pay for a good or service. In general, economic analysis

values all items at their value in use or their opportunity cost to society (often a border price

for tradable items). It has the same meaning as social cost-benefit analysis.

Economic impact analysis - The analysis of the total effects on the level of economic activity

(output, income, employment) associated with the intervention. This kind of analysis focuses

on macroeconomic indicators and forecasts the influence of the project on these indicators.

It goes beyond CBA when very large projects are considered in relatively small economies.

Economic rate of return (ERR) - The socio- economic profitability of a project. It may be

different from financial rate of return (FRR), because of price distortion. ERR implies the use

of accounting prices and the calculation of the discount rate that makes project benefits

equal to present costs, i.e. makes economic net present value (ENPV) equal to zero.

Elasticity - The ratio of the percentage by which one variable changes, given a 1 per cent

change in another. A measure of the percentage change in one variable in respect of a

percentage change in another variable. Thus the price elasticity of demand is the percentage

change in quantity that is demanded expected in respect of a percentage change in the price

of the same good.

Environmental impact analysis - The statement of the environmental impact of a project

that identifies its physical or biological effects on the environment in a broad sense. This

would include the forecasting of potential pollution emissions, loss of visual amenity, and so

on.

Externality - An externality is said to exist when the production or consumption of a good in

one market affects the welfare of a third party without any payment or compensation being

made. In project analysis, an externality is an effect of a project not reflected in its financial

accounts and consequently not included in the valuation. Externalities may be positive or

negative.

Ex-ante evaluation - The evaluation carried out in order to take the investment decision. It

serves to select the best option from the socio economic and financial point of view. It

provides the necessary base for the monitoring and subsequent evaluations ensuring that,

wherever possible, the objectives are quantified.

Ex-post evaluation - An evaluation carried out a certain length of time after the conclusion

of the initiative. It consists of describing the impact achieved by the initiative compared to

the overall objectives and project purpose (ex-ante).

Financial analysis - The analysis carried out from the point of view of the project operator. It

allows one to 1) verify and guarantee cash balance (verify the financial sustainability), 2)

calculate the indices of financial return on the investment project based on the net time-

discounted cash flows, related exclusively to the economic entity that activates the project

(firm, managing agency).

Financial rate of return (FRR) - The financial profitability of a project, see internal rate of

return. Not to be confused with financial ratios such as return on sales (ROS) or return on

investment (ROI).

Gross domestic product (GDP) - The total product or value added within the physical

borders of the country. It includes production based on foreign- owned resources, even

though part of the income earned by these factors of production is transferred abroad as

factor service income payments.

Income multiplier - Ratio between national income variation and the expenditure variation

that caused it.

Inflation - A sustained rise in the general price level; the proportionate rate of increase in

the general price level per unit of time.

Intangibles - Costs or benefits that resist quantification.

Internal rate of return - The discount rate at which a stream of costs and benefits has a net

present value of zero. Financial rate of return (FRR), when values are estimated at actual

prices. Economic rate of return, (ERR) when values are estimated at accounting prices. The

internal rate of return is compared with a benchmark in order to evaluate the performance

of the proposed project.

Marginal cost - The extra cost of producing an extra unit of output.

Market price - The price at which a good or service is actually exchanged for another good or

service or for money, in which case it is the price relevant for financial analysis.

Merit good - An additional criterion of project appraisal applied when the government has a

preference for more or less consumption of particular goods, such as education and alcohol

respectively.

Multicriteria analysis - An evaluation methodology that considers many objectives by the

attribution of a weight to each measurable objective. MCA is an evaluation methodology

that considers many objectives by the attribution of a weight to each measurable objective.

In contrast to CBA, that focuses on a unique criterion (the maximisation of social welfare),

Multi Criteria Analysis is a tool for dealing with a set of different objectives that cannot be

aggregated through shadow prices and welfare weights, as in standard CBA.

Mutually exclusive projects - Projects that, by their nature, are such that if one is chosen the

other one cannot be undertaken.

Net present value (NPV) - The net value or net benefit of a project when all costs and

benefits have been discounted to the present at the discount rate. ENPV, economic net

present value. FNPV, financial net present value.

Net social income - The net increase in income inputted to the project, on the basis of

accounting prices - equivalent to the net present value.

Nominal prices - Current prices - these of course include the effects of inflation and are to be

contrasted to constant or real prices.

Nominal wages - Wages that include the effects of inflation, also current wages.

Non-tradeable goods - Goods that cannot be exported or imported, e.g. local services,

unskilled labour and land. In economic analysis, non-traded items are often valued at their

long-run marginal cost if they are intermediate goods or services or according to the

willingness-to-pay criterion if they are final goods or services.

Opportunity costs - The value of a resource in its best alternative use. For the financial

analysis the opportunity cost of a purchased input is always its market price. In economic

analysis the opportunity cost of a purchased input is its marginal social value in its best non-

project alternative use for intermediate goods and services, or its value in use (as measured

by willingness-to-pay) if it is a final good or service.

Option value - The present value of a capital asset in the best alternative use, opportunity

cost of a capital asset.

Par Value or Face Value - Equals the value of the bond at maturity. For example, a bond with

a $1,000 dollar par value will pay $1,000 to the issuer at the maturity date.

Payback period - The time taken for a project to recover the initial investment. Similarly, the

discounted payback period is the time taken for the present value of the projects earnings

stream to cover the initial investment.

Producers surplus - The value a producer receives over and above his actual costs of

production.

Public Private Partnership - A partnership between the public sector and the private sector

for the purpose of delivering a project or a service traditionally provided by the public

sector.

Public good - A good which, because it cannot be withheld from one individual without

being withheld from all, must be supplied publicly. National defence, street lighting, and

general police protection are examples. Non-rival goods are also considered public goods

because supplying them to one person does not reduce the supply to another person.

Private goods - Goods characterized by very high levels of subtractability and excludability.

Subtractability means that one persons consumption of the good reduces the quantity

available to others. Excludability means that the producer can restrict use of the product to

those consumers who are willing to pay for it, while excluding those who do not meet this or

other criteria. Private goods can be produced under private ownership or under public

ownership. Except under special circumstances, for example, production in conditions of

natural monopoly and where the government lacks the capacity to regulate, production of

private goods increasingly is undertaken under private ownership.

Real convergence - Reduction of disparities of per capita income and economic welfare

among regions.

Real rates - Rates deflated to exclude the change in the general or consumption price level.

Regression analysis - A set of statistical techniques, whose purpose is to quantify the

relationship between two or more variables. Widely used in the quantitative forecasting of

demand.

Residual value - The net present value of assets at the final year of the period selected for

evaluation analysis.

Risk analysis - A study of the odds of the project's earning a satisfactory rate of return and

the most likely degree of variability from the best estimate of the rate of return. Although

risk analysis provides a better basis than sensitivity analysis for judging the riskiness of an

individual project or the relative riskiness of alternative projects, it does nothing to diminish

the risks themselves. It helps, however to identify risk prevention and management

measures.

Sensitivity analysis - A study of the impact that pre-assigned changes in variables affecting

costs and/or benefits would have on the ERR or FRR.

Shadow prices - See accounting prices. A price which is imputed as the true marginal value

of a good or opportunity cost of a resource and which may differ from the market price.

Social discount rate - Social discount rate is to be contrasted to financial discount rate. It

attempts to reflect the social view on how the future should be valued against the present.

Socio-economic costs or benefits - Opportunity costs or benefits for the economy as a

whole. They may differ from private costs to the extent that actual prices differ from

accounting prices. (social cost = private cost + external cost).

Social opportunity cost of capital - An approach to setting discount rates for evaluation

purposes based on the gross return available from alternative public or private uses of

capital. To be distinguished from the rate of time preference approach which is based on

individuals preferences for current rather than deferred consumption.

Standard deviation - It is a measure of the spread of data about their mean (m) and an

essential part of many statistical tests. The standard deviation depends on calculating the

average distance that the observation (x) is from the mean.

Sunk cost - An asset, the opportunity cost of which is zero, or as close to zero as makes no

difference.

SWOT analysis - Briefly describes both the intrinsic characteristics of the initiative and the

context in which it is realised; enabling alternative development scenario to be analy- sed. It

analyses the context in which one intends to intervene and shows the internal factors upon

which to concentrate (strengths) or which need to be cancelled out (weaknes- ses), as well

as the favourable (opportunities) or unfavourable (threats) external factors.

Tradeable goods - Goods that can be traded internationally in the absence of restrictive

trade policies.

Transactions costs - The costs, other than price, incurred in the process of exchanging goods

and services. These costs include the costs of negotiating and enforcing contracts, and the

costs of collecting charges for goods and services provided. The scale of economic and

financial transactions costs can affect the market structure for a good.

Transfers Payments - Which redistribute income but which do not reflect either the value of

a good to a consumer or the costs of its supply. As such they are excluded from a cost-

benefit analysis, but are included in the distributional incidence assessment.

Unit of account - The measure that makes it possible to add and subtract unlike items. ECU

may be the unit of account for the appraisal of EC financed projects.

Willingness to pay - The maximum amount consumers are prepared to pay for a good or

service. If a consumer's willingness to pay for a good exceeds its price, the consumer enjoys

a rent (consumer surplus). The valuation placed by an individual on a good or service in

terms of money. The valuation is in two parts: market price and consumer surplus, if any.

Willingness to accept The minimum amount of compensation consumers would be willing

to accept for foregoing units of consumption. It is the analogous approach of finding out how

much people are willing to pay to avoid a loss, or how much they are willing to accept in the

way of compensation to put up with the loss.

Without project scenario - The baseline scenario against which the additional benefits and

costs of the with project scenario can be measured (e.g. business as usual). In project

analysis, the relevant comparison is the net benefit with the project compared with the net

benefit without the project, in order to measure the additional benefits that can be

attributed to the project.