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How Does the Cost Benefit Analysis and Financial Analysis Relate

This article explores the distinctions between financial and economic analyses in project assessment, emphasizing their relationship within the context of the World Bank. It highlights how economic analysis focuses on incremental benefits and costs, utilizing methods such as the "With and Without Test" to capture externalities effectively. The financial sustainability of projects is also stressed, requiring thorough financial tests to meet obligations. It elaborates on the roles of financial analysts in achieving solutions that balance economic justification with financial viability to ensure sustainable project outcomes.

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How Does the Cost Benefit Analysis and Financial Analysis Relate

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  1. How Does the Cost Benefit Analysis and Financial Analysis Relate The World Bank

  2. Difference Between Financial vs. Economic Analysis • The Economic analysis focuses on incremental benefits and costs arising from a given Project and includes both project benefits and externalities. • This is typically best achieved through a “With and Without Test” as you can better identify the incremental values. • While the “Project” specific analysis may be important for the Financial test, the consolidated analysis is even more important to ensure sustainability of the utility or the system. • The economic test is not usually concerned with cash flows so the ENPV or EIRR usually suffice to ensure the Project’s returns surpass the Opportunity Cost of Capital of the Government. • The Financial Sustainability Analysis must find a solution to ensure that all financial obligations are satisfied.

  3. Who’s Perspective Determines the Analytical Scope and Financial Test

  4. As Development Professionals We should focus on expanded or improved services hence the economic value of the Project. However, we also need to ensure the financial sustainability of the utility. The Role of the Financial Analyst is to Find a Financially Sustainable Solution to Economically Justified Projects

  5. So the Difference Between Financial vs. Economic Analysis is Much More than differentiating Costs and Benefits!

  6. Determining the Justification for VGF Financing Financial Costs & Benefits Adjustments for Economic Costs & Benefits 23 44 Financial Viability Gap 21 NPV in US$ millions 37 21 23 13 3 Water Collection Savings Health Related Transfer Payments Revenues Costs

  7. A Simplified Approach to Deriving Economic Costs and Benefits

  8. Thank You

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