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Main Features of Projects, Project Resource Statements and Financial Statements

This document discusses key differences between project resource statements and financial statements. It defines projects and the different viewpoints - total capital and owner/equity capital - that statements can take. Project resource statements look at overall economic impacts from total capital perspective, while financial statements measure net effects for the owner from financing and taxes. The document also covers prices used in statements, types of projects, and identifying new resources versus without-project scenarios.

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177 views18 pages

Main Features of Projects, Project Resource Statements and Financial Statements

This document discusses key differences between project resource statements and financial statements. It defines projects and the different viewpoints - total capital and owner/equity capital - that statements can take. Project resource statements look at overall economic impacts from total capital perspective, while financial statements measure net effects for the owner from financing and taxes. The document also covers prices used in statements, types of projects, and identifying new resources versus without-project scenarios.

Uploaded by

Asma Zeeshan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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MAIN FEATURES OF

PROJECTS, PROJECT
RESOURCE STATEMENTS
AND FINANCIAL
STATEMENTS
Basic Definitions
 Project: A project involves commitment of resources now (in year 0)
to obtain extra resources in the future years

 Project Statement: includes all the inflows and outflows of a project


according to the time period in which they occur.

 Projects can be analyzed from different points of view:


 Project Resource Statements
 Project Financial Statements

Today we will study some basic differences between both types of


statements and the prices used in drawing them up.
Project Viewpoints

 A project can be analyzed from two different


points of view:

1) Viewpoint of Total Capital

2) Viewpoint of Project Owner Or Equity


Capital
Viewpoint of total capital

 An analysis from the viewpoint of total capital must include all the resource
costs as well as the resource benefits

 From the point of view of total capital, assessment of the project is based on
its overall economic impact regardless of how it is financed and regardless
of the projects effect on the government budget.

 If projects can be demonstrated as beneficial from the viewpoint of total


capital, then the economy as a whole will benefit from them

 In a nutshell, when you look at the project as a whole, analyzing its


economic effects, it is from the viewpoint of total capital.
Viewpoint of Project Owner/Equity Capital

 This point of view is important because no project,


however worthwhile will be implemented unless there is
a sufficient return to the owners

 Emphasis is on return to the owners, thus it is important


to consider financial issues
 How do loan inflows and outflows affect owner returns
 How do taxes affect net profits
 Is the government offering any subsidies or tax holidays?
Types of Project Statements

1) Project Resource Statement


 Is from the point of view of total capital which includes
 Resource costs such as investment, operating, working capital
 Resource Benefits

2) Project Financial Statement


 Financial statements are from the point of view of owner or equity
capital to measure the net effects of the project.
Project Perspectives and Statements

Perspective Statement
National Resource Statement at economic
Economy prices (economic analysis at econ
prices)
Total Capital Resource statement at financial
prices (pre-tax & post-tax)
Owner/Equity Financial statement = Resource
Capital Statement at financial prices
adjusted for net taxes and form of
financing (loan or equity).
Prices

  In preparing project statements (financial or resource),


prices are used to express the inputs and outputs of a project
in value terms to arrive at a common denominator. A
consistent set of prices must be used for all future costs and
benefits.

 Both Resource Statements and Financial Statements can be


drawn up using different prices
 Current versus constant prices
 Financial versus shadow prices
 Nominal versus real prices
 Absolute versus relative prices
Constant Prices Versus Current
Prices
 Nominal price is interchangeably used with current price,
and real price with constant price.
 Current price is the term used to define the value of the
inputs and outputs, and includes the effects of general
price inflation.
 Constant price refers to a value from which the overall
effect of a general price inflation has been removed.
 Using constant prices ensures that the future costs and
benefits of the identified project alternatives are estimated
in the same units as the costs and benefits measured in
year 0.
 Multiply current prices by some suitable deflator to get
constant prices (discounting)
 After discounting, current prices is same as constant
prices, hence no impact on decision making
Constant Prices Versus Current
Prices
 The use of constant prices is helpful when the project is of a long
term nature – eg. when the costs and benefits are spread out over a 10
years.

 This ensures that future costs and benefits of accruing from the
project are estimated in the same units as costs and benefits measured
in year 0.

 Current prices can be used when the project is of a short term nature
(usually for projects that are completed within a couple of years)
Financial versus Economic Prices

 Financial prices are the actual prices at which inputs are bought and
outputs sold and are used in financial analysis.

 In economic analysis, where prices are distorted due to market or


government failure, it is necessary to impute the price that reflects the
real economic value of an input or an output - its shadow price.

 Where price does not reflect the actual value of a good or commodity,
or no market value for a good or commodity exists, shadow
pricing can be used.
Shadow Prices
 Shadow pricing is a proxy value of a good, often defined by what
an individual must give up to gain an extra unit of the good.
 The value of a good or impact resulting from a project when
measured using shadow pricing may, however, differ from the
value of that or similar goods or impacts when measured using
market prices.
 This occurs due to market failure in real markets which impacts on
the shadow value of certain goods and impacts. 
 Shadow pricing can be used to obtain a valuation of the impacts of
a project
For e.g. Steel Manufacturer
Shadow price is greater than market price because steel producer
does not account for marginal social cost of pollution in
production costs.
Relative Versus Absolute Prices
 Absolute prices refer to the value attached to an input or output.
 Relative prices refer to the value of an input or output in terms of each
other.
 Even where general price increases are removed through the use of
constant prices, it is possible that the relative prices of inputs and
outputs would vary because productivity and technology changes,
natural calamity
 The price of an input may increase either slower or faster than the
prices of other inputs and the output, or vice versa. In such cases, the
corresponding effects of the relative price change on the project
statement should be included.
 In economic analysis, a change in the relative price of an input is
expected to result in a change in the amount that must be foregone by
using such an input in the project instead of elsewhere in the economy.
Changes in relative prices must be reflected in the economic project
statement in the years when such changes are expected.
Types of Projects
 Basically three types of projects can be identified:
1) New Investments – are designed to establish a new
productive process independent of previous lines of
production
 Eg. Setting up an IPP – government calls forth application for tenders from
independent entities for the project

2) Expansion Projects- involve repeating or extending an


existing economic activity with the same output,
technology and organization.
 Eg. Unilever decides to introduce a new brand of shampoo
Types of Projects
3) Updating Projects - Involves replacing or
changing some elements in an existing activity
without a major change in output.
 Eg. Gul Ahmed Textiles buying new state of the art
machinery for textile manufacturing in order to
increase productivity.
New Resources Versus Resources without
the Project
 In all the three types of projects, the effect of using new resources
will have to be identified.
 How do you measure this effect?
 By identifying the additional costs and benefits – resources that
would be used in the project over and above what would otherwise be
used, and the benefits over and above what would otherwise have
occurred without the project.
 For a new project, the whole of output and the whole of costs will be
additional (incremental)
 For expansion or updating projects, the effect of new resources will
have to be separated from the effects of resources without the project
 (With benefits – With Costs) – (Without Benefits – Without Costs)
Project Benefits and
Costs: Different Types
of Projects

Figure A Traces total costs


and
Benefits of new investment

Figure B shows the costs and


benefits without and then with
an expansion investment.

Figure C shows an updating


investment where the costs
and benefits will have a
downward trend unless the
new investment in undertaken.
Directly Productive and Indirectly
Productive Projects

 Project Costs are generally easier to identify and estimate than project
benefits. In this respect, a distinction can be drawn between directly
productive projects and indirectly productive projects.

 Directly Productive: where the project costs and benefits accrue to a


single organization eg. Unilever’ launch of a new shampoo

 Indirectly Productive: where the benefits derived from the project


do not accrue to organization responsible for carrying out the costs.
Eg? Most public infrastructure projects like roads, sewerage systems
etc – benefits accrue to users or the producers while costs are borne
by the government.

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