What Are The Economic And Financial Aspects Of Project Evaluation?


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Muhammad Abdullah786 Profile
In economic analysis, the impact of a project on the economy as a whole is examined. It is the social benefit of a project which is matched with its social cost. Thus a project is looked upon from its social standpoint and not from the viewpoint of an individual contributor of equity, capital. It is in economic analysis that the spillover effects or supplementary benefits and costs are also considered and the scope of analysis extends beyond direct benefits and cost and includes indirect contribution as well. Furthermore, in economic analysis, shadow prices or equilibrium prices of factors of production are used whereas in financial analysis, market prices are pressed into service.

A third difference is that taxes and subsidies are considered transfer payments in economic analysis and excluded from benefits and costs. In financial analysis, on the other hand, taxes and subsidized are not considered as transfer payments. Taxes are included as benefits. Fourthly, economic analysis is neutral to income distribution and capital ownership. This is not the case with financial analysis.

The financial analysis determines financial viability of projects and the prospective return to the equity capital of an investor. The possible sources of finance of a project along with its repaying potential are examined to see if the project will be profitable.

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