GESTIÓN DE INVENTARIOS

A. Project Decisions

125. The preceding sections outlined the principles for identification, quantification, and valuation of project costs and benefits. The resulting streams of costs and benefits are used to make project choices. Essentially, there are three types of project decisions for which criteria are needed:

• choice of the least-cost option for achieving the same benefits, • choice of the best among project alternatives, and

• testing the economic viability of the best option.

126. The first type of decision occurs when benefits cannot be valued for comparison with project costs. Such situations are discussed in Chapter IX. The purpose is to achieve the same benefit effect at the lowest cost. The second type of decision occurs at the early stages in all projects, when choices are being made about project location, scale, size, and other features of project design. Costs and, to some extent, benefits may differ between mutually exclusive alternatives. The purpose is to choose the best alternative from the point of view of the national economy. The third type of decision is the basis for agreeing to fund a project or not. The best project alternative may not be economically viable. A test is needed of the economic viability of the best alternative for a project, in short, whether a proposed project is acceptable for investment or not.

127. To make these decisions, all cost and benefit streams are discounted to present value. Present costs and benefits are accorded a larger weight than those in the future. Moreover, the weights on future costs and benefits are treated as decreasing at a constant rate each year. To determine the least-cost option or to compare project alternatives, the same discount rate should be applied to the various cost and benefit streams. For this purpose, the Bank uses a discount rate between 10 and 12 percent. The same discount rate should be used to determine if a project is economically viable. In choosing the best alternative or testing economic viability, where costs and benefits are measured in economic prices, this discount rate for decision-making purposes should be regarded as the economic discount rate relevant for economic prices (see Section XI).

B. Choosing Between Alternatives When Benefits Are Not Valued

128. Where the benefits of a project cannot be valued, they cannot be aggregated with the costs of the project. In these circumstances, a decision can be made only about which option has the lowest present value of costs for providing a given level of output. If the full costs of each alternative are laid out over the full life of the project, including any residual value at the end of the project life, then for each alternative the present value of costs can be calculated

using the chosen discount rate between 10 and 12 percent. The best alternative is the option with the lowest present value of economic costs.

Criterion: Choose option with lowest present value of economic costs at chosen discount rate (between 10 and 12 percent)

129. The choice between cost alternatives can also be approached another way. The discount rate that equalizes the costs of different options compared in pairs—the equalizing discount rate—can be calculated. Comparison of the equalizing discount rate with the Bank’s discount rate for decision-making purposes will identify the least-cost option between successive pairs of options.

130. Where the cost alternatives do not provide exactly the same level of output, or where different cost alternatives have multiple and differing outcomes, it is difficult to identify the option with lowest present value of costs without placing weights on the outcomes from the different alternatives. In these cases, the approach has to be adjusted to consider both the target level of attainment of different outcomes that is desired, and the extra costs of the different alternatives of achieving higher levels for the outcomes.

C. Choosing Between Alternatives When Benefits Are Valued

131. Where the benefits of a project and project alternatives can be valued, they can be aggregated and compared with the costs of the project or project alternatives. Three criteria are commonly used to aggregate and compare costs and benefits. However, they cannot all be used in the same way to choose from project alternatives.

132. The benefit-cost ratio compares the present value of the cost streams with the present value of the benefit streams, each discounted at the same rate. The comparison is made by forming the ratio of the present value of benefits to the present value of costs. However, the benefit-cost ratio should not be used for choosing from alternatives as the ratio is sensitive to the way in which benefits and costs are grouped, for example, whether residual values are subtracted from the cost streams or added to the benefit streams.

133. The net present value (NPV) also compares the present value of the cost streams with the present value of the benefit streams. However, it does so not as a ratio but by taking the cost stream away from the benefit stream to obtain the net benefit stream, which can then be discounted. In choosing between project alternatives, the alternatives can be ranked according to their NPVs, which at economic prices represent the present value of net output that will be generated in the economy over the life of the project. The economic net present value (ENPV) is calculated for each project alternative using the Bank discount rate of 10 to 12 percent. 134. The third criterion for summarizing the benefit and cost effects of a project alternative is the internal rate of return (IRR). The IRR represents the rate of return in economic prices that would be achieved on all expenditures of the project. The EIRR is

calculated using the net benefit stream obtained by subtracting year by year all costs from all benefits. The EIRR is the rate of discount for which the present value of the net benefit stream becomes zero. Put another way, it is the rate of discount at which the present value of the cost stream is equal to the present value of the benefit stream.

135. The ranking of project alternatives according to these three criteria may differ. The overriding purpose of the economic analysis of projects is to increase the net output measured at economic prices in the national economy. The ENPV criterion measures this directly. The choice between project alternatives should be made using the ENPV criterion at the chosen rate of discount, between 10 and 12 percent.

Criterion: Choose project alternative with the highest ENPV at the chosen discount rate (between 10 and 12 percent)

D. Testing the Economic Viability of the Best Alternative

136. The best project alternative may not be economically viable. A test of viability needs to be applied to the chosen alternative, and to any subprojects within it. The basic test for economic viability is whether or not there are other projects in the national economy that, when estimated in the same way, would yield a greater increase in net output. In practice, not all investment opportunities are collected together and compared. The way this comparison is done is to specify a rate of discount representing the next best alternative project in the economy, and to ensure that the project being analyzed creates net benefits in present value at a rate that exceeds those of the next best alternative. This can be done using any of the three criteria discussed above.

137. The chosen rate of discount for decision making is between 10 and 12 percent. At a discount rate within this range, the two main criteria can be used as follows:

• Net Present Value: the discounted value of economic net benefits should be positive.

Criterion: Accept all independent projects and subprojects for which the ENPV is greater than 0.

• Economic Internal Rate of Return: The economic internal rate of return on resources should exceed that on the next best alternative project.

Criterion: Accept all independent projects and subprojects for which the EIRR is greater than the chosen discount rate.

138. These two criteria are equivalent. They will lead to the same acceptance and rejection of independent projects and subprojects.