financial and economic analysis of education projects

Financial and Economic Analysis of Education Sector Projects
Koji Fujimoto
In determining whether to invest or not on a development project, we usually carry out
a financial or an economic analysis depending on the nature of the project. Financial
analysis is meant for private sector projects which yield revenue or profit, and economic
analysis for public sector projects which often do not accrue revenue.
These two basic analytical methods have long been established and applied to a vast
number of projects undertaken, regardless of their sectors and characteristics. In spite
of this fact, feasibility study reports by consultants and appraisal documents by
multilateral development banks (hereinafter referred to as MDBs) such as the World
Bank and the Asian Development Bank have not necessarily revealed truly practical
and ready-to-use methods of analysis. To a lesser or greater extend, some of the critical
aspects of the analysis are hidden in black boxes within most of those reports.
Education sector projects are not an exception.
This paper, therefore, primarily intends to explore and identify practical and
ready-to-use mechanics of the analytical procedures that are applicable to real projects.
To this end, a variety of hypothetical cases are introduced and analyzed hereafter.
1. Definition
Generally speaking, the terms “financial analysis” and “economic analysis” are used
in the broad sense. Namely, financial analysis and economic analysis cover such
dimensions as if the investment project in question can secure its validity, viability and
“bankability” in totality.1 In this connection one may recall that feasibility study reports
usually undertaken by consultants at the project preparation stage, and appraisal
reports undertaken by the MDBs at the project appraisal stage right before loan
approval, come together in what is known as the project cycle.２
In our present discussion, however, we define both analyses in a narrow sense,
namely financial analysis will specifically imply “Cost-Profit Analysis” while economic
analysis will reflect “Cost-Benefit Analysis”.
2. Cost-Profit Analysis and Cost-Benefit Analysis
Cost-Profit Analysis and Cost-Benefit Analysis aim to measure the respective internal
rate of return (hereinafter referred to as IRR) of a particular project by analyzing its

cash flows. Needless to say, IRR is a proxy of project profitability or “benefitability” and
used as a critical factor to judge if the project is to be implemented.

1


The IRR of Cost-Profit Analysis is called the Financial Internal Rate of Return
(hereinafter referred to as FIRR). This analysis usually calculates FIRR only. The IRR
of Cost-Benefit Analysis is called the Economic Internal Rate of Return (hereinafter
referred to as EIRR). This analysis usually calculates not only EIRR but also the Net
Present Value (hereinafter referred to as NPV) and the Benefit/Cost Ratio (hereinafter
referred to as B/C Ratio) of the project.

(1) Cost-Profit Analysis (Financial Analysis)
In the private business sector, investors do not aim to lose their investment. They
make it a rule to scrutinize carefully the validity and viability of every investment
project before an actual investment decision takes place. As FIRR is regarded as the
most important criteria of investment, this analysis plays an indispensable role in
pre-investment project study. And when a FIRR is higher than the expected rate of
return (say, a prevailing commercial interest rate), the investor will likely decide to
invest.
The method to obtain FIRR is well-known. As defined, the internal rate of return is
the rate of discount at which the present value of the profit stream is equal to the
present value of the cost stream, or for which the present value of the net profit stream
becomes zero. It is equivalent to the discount rate r that satisfies the following
relationship:
n

n

t 0

t 0

 Ct /(1  r ) t   Pt /(1  r ) t ,
or
n

 ( P  C ) /(1  r )
t 0

t

t

t

 0,

where Pt is the profit stream, Ct is the cost stream and n is the number of years of
project life.
(2) Cost-Benefit Analysis (Economic Analysis)
Cost-Benefit Analysis is primarily meant to apply to a public sector project, which
does not accrue revenue/profit in the commercial sense. In this analysis, therefore, we
will identify (economic) costs and (economic) benefits, whose values are different from
domestic market values. The analysis, seeks to find the true values of additional costs
and benefits borne by a project to the local/national economy. To pursue this, it is a
general practice to introduce a few particular conversion factors to change costs and

2

benefits from the domestic market values to the true economic values. Against this
background, the term “benefit” is employed in the economic analysis in place of “profit”
in the financial analysis.
Similarly as in case (1) above, this analysis aims to obtain EIRR as well as NPV (the
net present value) and B/C Ratio (the benefit-cost ratio). The EIRR is usually expected
to be larger than a certain level, say, 10~12 %, for investment decision-making; NPV is
to be positive at a given discount rate; and B/C Ratio is to be equal to or larger than 1
(one) at a given discount rate.
The economic internal rate of return (EIRR) is equivalent to the discount rate r*
which satisfies the following relationship:
m

m

i 0

i 0

 Ci /(1  r*)i   Bi /(1  r*)i ,
or
m

 ( B  C ) /(1  r )
i

i 0

*

i

i

 0,

where Bi is the (economic) benefit stream, Ci is the (economic) cost stream and m is the
number of project life years.
The net present value (NPV) is the difference between the present value of the benefit
stream and the present value of the cost stream for a project. It is calculated by the
following formula:
m

m

i 0

i 0

 Bi /(1  r*)i   Ci /(1  r*)i

.

The benefit-cost ratio (B/C Ratio) is calculated by the following formula:

 B /(1  r ) ／ C /(1  r ) .
m

i 0

m

i

*

i

i 0

i

*

i

3. Cost-Profit Analysis of Education Sector Projects
Education sector projects can broadly be divided into two groups：those projects to
which Cost-Profit Analysis is applicable and those to which Cost-Benefit analysis is
applicable. In the former case projects may be understood in analogy with private sector
investment projects such as those projects in the shoe manufacturing, bakery,
restaurant and the like, particularly from the viewpoint of owner-cum-investor, and are
dealt with in this section. The latter type of projects are mostly public investment
projects undertaken by public authorities, which are, therefore, analyzed from the
viewpoint of the local/national (macro) economy and are subsequently dealt with in

3

section 4 below.
To illustrate the mechanics of Cost-Profit Analysis, three kinds of hypothetical case
studies, which exhaust all the possibilities of this type of analysis in the education
sector, are carried out in this section.
(1) School Construction and Management Project
To illustrate the case clearly, the following assumptions are set forth.
① Project Description
An investor-cum-owner plans to establish a new 4-year university which
specializes in the “Development Studies of the Developing Countries”. According
to the plan, it takes one entire year (say, 2007 or year 0) to construct the physical
structures of the university and recruit teaching and office staffs. From the
second year (2008 or year 1), the university accepts 250 students per year.
Therefore, at the beginning of the fifth year (2011 or year 4), the number of
students reaches 1,000, which means that the university is in operation at full
capacity. The university completes its mission and is closed at the end of the 26th
year (2032 or year 25). The project life is, thus, 26 years including the
construction period.
② Costs (Cash Out-flows)
From the viewpoint of the investor-cum-owner, investment costs could be divided
into four components, namely:
i. Buildings and facilities construction costs (including land acquisition,
designing and consulting services, equipment/materials, labor, physical
contingencies and so on) of 12 million dollars are required in year one of the
plan. Within this year, all the university facilities are constructed and all the
costs are paid to the contractors.
ii. Operation and maintenance (hereinafter referred to as O&M) costs per year are
estimated at 4% of the construction costs and start to accrue from the second
year of the project up to the final year of project life.
iii. Salaries and other recurrent costs are projected to be 5 million dollars (US) per
annum. The university is to pay this amount uniformly from 2008 through

the last year of operation (2032). Staffing is completed by the beginning of
2008.
iv. The university as a private sector business entity is to pay tax out of its “profit
before tax” to the government. And this is estimated at 0.3 million dollars per
annum.
4


③ Revenues/Profits (Cash In-flows)
i. Entrance fee per student is set at 0.002 million dollars (2,000 dollars) and
tuition per student per annum at 0.006 million dollars (6,000 dollars).
Subscription or contribution by graduated students is not assumed to accrue.
ii. The university is to receive a government subsidy of 0.0015 million dollars
(1,500 dollars) per student per annum.
iii. To avoid complexity, the scrap (salvage) value of the university buildings and
facilities including land is not counted. That is, it is assumed to be zero at the
end of project life.
Before calculating FIRR based on cash flow analysis, it might be helpful to grasp
the entire picture of the case in terms of stakeholders, cost/benefit items and
directions of cash flows by figure presentation (Figure 1 below).

Figure1 Cash Flows among Stakeholders of the University
Construction/Management Project

Project Entity (Investor-Owner of University)
Tuition/
Entrance
Fee

Subsidy

Construc
-tion
Contractor/Const
ruction
Company

Tax

Subscription/
Contribution

Grants

Students/Graduated
Students/Parets/Others

Government

shows cash flow and its direction.
Source: Author
④ Cash Flow Table
Against the background above, we can now prepare a cash flow table, in which
cash flows of costs and revenues/profits are sorted out over the life of the
project--26 years. To prepare the cash flow table is not a difficult task. Simply, a
table format is filled in step by step in accordance with the assumptions given in
①, ② and ③ above.
Project life spans the period from year 0 (2007) through year 25 (2032). Every

5

year, 250 students are enrolled in the university with the first term students
entering the university in 2008 (students of 2008). In 2011, therefore, the total
number of enrolled students becomes 1,000. The final term students (the 22nd
term students or students of 2029) are enrolled in 2029. Subsequently, the
number of students decreases annually by 250 until reaching zero at the end of
2032.
The 12 million dollar construction costs is paid to the contractor in 2007 and,
from the second year, the university spends 0.48 million dollars (4% of 12 million
dollars) per annum for the O&M of buildings and facilities until its closure year.
As annual salaries and other recurrent costs are fixed in a lump sum at 5 million
dollars, this amount is simply inserted in the table format. The university usually
offers student scholarships/grants, but, in our present case, this practice is
excluded for the sake of simplification. The final component of costs is tax. The
amount of tax is usually derived from “Income Statement” and varies from year
to year. But, here, it is simply assumed that the university pays 0.3 million
dollars annually to the government.
On the revenues/profits side, entrance fee, tuition and subsidy are calculated
annually and are inserted in the table format, while subscriptions/contributions
and scrap/salvage values are assumed zero. The total entrance fee amounts to 0.5
(0.002×250) million dollars from 2008 through 2029, and becomes zero for the
remaining 3 years. The total tuition amounts to 1.5 (0.006×250) million dollars
in 2008 and reaches 6 (0.006×1,000) million dollars in 2011 which remains a
constant until 2029, and towards the closure year of 2032, the amount of tuition
contrarily decreases each year. The total government subsidy amounts to 0.375
(0.0015×250) million dollars in 2008 and reaches 1.5 (0.0015×1,000) million
dollars in 2011 remaining constant until 2029, and towards the end of project life,
the amount of subsidy decreases. As subscriptions or contributions from the
graduated students are not assumed, related cash in-flows are not added. The
scrap (salvage) value of the project is normally regarded as cash in-flow, but it is

assumed zero in this case.
In accordance with the values given above, all cash flows are itemized and
sorted out chronologically, resulting in the final cash flow table, shown as Table 1
hereunder.
⑤ FIRR
The FIRR is then calculated by utilizing data in the first column on the right, “Net
Revenues/Profits”. An IRR calculation program is included within Microsoft Excel
6


software.3 In our present case, the FIRR is 0.0787 or 7.9%.
The FIRR of 7.9% may not be as high as the investor would have expected.
Whether or not the project is undertaken is a matter of judgment.
Table 1 Cash Flows of the University Construction/Management Project
( U n i t :

m i l l i o n

d o l l a r s )

C o s t s

C o n
Y e C
a ra sl e New
n d Na ur m b e r
r u c
a f t Ye er aEntrants
r
S t u d e n t

C o s

s
o
tO
s
t

12

R e v e n u e s / P r o f i t s
Net
t T o t Revenues
a l
f
S t u d e Tn ot tE a n l t r a n c e
S u S
b .c /r a p
i & oSMn a l a r i eT sa x
T u i t Si uo bn s i d yR e v e /Profits
n u e s
G r a n t Cs o s tF se e
C o Vn a. l u e
s
/ P r o f i t s

0 2007

0

0

0

0

0

12

0

1 2008

250

250

0 0.5

5

0 0.3 5.78

0

0.5

0

0 n.a.

1.5 0.375

0

0 n.a.

2 2009

250

500

0 0.5

5

0 0.3 5.78

0.5

3 2010

250

750

0 0.5

5

0 0.3 5.78

0.5

4 2011

250

1000

0 0.5

5

0 0.3 5.78

0.5

6

5 2012

250

1000

0 0.5

5

0 0.3 5.78

0.5

6 2013

250

1000

0 0.5

5

0 0.3 5.78

7 2014

250

1000

0 0.5

5

8 2015

250

1000

0 0.5

9 2016

250

1000

10 2017

250

11 2018

3

0

-12

2.375 -3.405

0.75

0 n.a.

4.25

-1.53

4.5 1.125

0 n.a.

6.125

0.345

1.5

0 n.a.

8

2.22

6

1.5

0 n.a.

8

2.22

0.5

6

1.5

0 n.a.

8

2.22

0 0.3 5.78

0.5

6

1.5

0 n.a.

8

2.22

5

0 0.3 5.78

0.5

6

1.5

0 n.a.

8

2.22

0 0.5

5

0 0.3 5.78

0.5

6

1.5

0 n.a.

8

2.22

1000

0 0.5

5

0 0.3 5.78

0.5

6

1.5

0 n.a.

8

2.22

250

1000

0 0.5

5

0 0.3 5.78

0.5

6

1.5

0 n.a.

8

2.22

12 2019

250

1000

0 0.5

5

0 0.3 5.78

0.5

6

1.5

0 n.a.

8

2.22

13 2020

250

1000

0 0.5

5

0 0.3 5.78

0.5

6

1.5

0 n.a.

8

2.22

14 2021

250

1000

0 0.5

5

0 0.3 5.78

0.5

6

1.5

0 n.a.

8

2.22

15 2022

250

1000

0 0.5

5

0 0.3 5.78

0.5

6

1.5

0 n.a.

8

2.22

16 2023

250

1000

0 0.5

5

0 0.3 5.78

0.5

6

1.5

0 n.a.

8

2.22

17 2024

250

1000

0 0.5

5

0 0.3 5.78

0.5

6

1.5

0 n.a.

8

2.22

18 2025

250

1000

0 0.5

5

0 0.3 5.78

0.5

6

1.5

0 n.a.

8

2.22

19 2026

250

1000

0 0.5

5

0 0.3 5.78

0.5

6

1.5

0 n.a.

8

2.22

20 2027

250

1000

0 0.5

5

0 0.3 5.78

0.5

6

1.5

0 n.a.

8

2.22

21 2028

250

1000

0 0.5

5

0 0.3 5.78

0.5

6

1.5

0 n.a.

8

2.22

22 2029

250

1000

0 0.5

5

0 0.3 5.78

0.5

6

1.5

0 n.a.

8

2.22

23 2030

0

750

0 0.5

5

0 0.3 5.78

0

4.5 1.125

0 n.a.

24 2031

0

500

0 0.5

5

0 0.3 5.78

0

25 2032

0

250

0 0.5

5

0 0.3 5.78

0

3

0.75

1.5 0.375

0 n.a.
0

0

5.625 -0.155
3.75

-2.03

1.875 -3.905

(2) Life-long Education Project
Similar to the above (1), a hypothetical case entitled “Life-long Education Project” for
an individual is set forth below.
① Project Description
Almost all children, as he/she grows older, receive formal and informal education.
Mr. and Mrs. Takushoku are determined to give their son, Taro (7 years old) who is
about to be enrolled in an elementary school, a good formal education from
primary through higher (tertiary) by sending him to private schools. Their country

7


has long instituted the 6-3-3-4 education system; namely, 6 years of elementary
school, 3 years of junior high school, 3 years of senior high school and 4 years of
university. Immediately before Taro’s primary education starts, Taro’s parents ask
themselves if Taro’s education of 16 years will pay off or not. In an attempt to find
an answer to this question, they decided to regard Taro’s life-time formal
education as an investment project and apply the method of cost-profit analysis to
determine its profitability.
② Costs (Cash Out-flows)

i. Tuitions and entrance fees are major costs of the project. During the elementary
school from age 7 to 12, Taro’s parents pay 6,000 dollars per annum on an
average, during junior high school from age 13 to 15, 7,000 dollars, during senior
high school from age 16 to 18, 8,500 dollars and during university from age 19 to
22, 10,000 dollars.
ii. Other education related direct costs such as uniforms, transportation, books and
so forth are excluded from the analysis for simplification.
③ Revenues/Profits (Cash In-flows)
i. Taro starts working right after his graduation from the university at the age of
23 with a starting annual salary of 20,000 dollars. He can expect an annual
salary increase of 5% throughout his career to the retirement age of 60. His
salary streams are deemed “after tax” as the salaried man’s income tax in the
country of the example is pre-deducted (taxation at the source). In the final year,
Taro receives 200,000 dollars as retirement severance pay.
ii. Student grants/scholarships as well as part-time income are assumed to be zero
for the sake of simplification.
In order to understand the above discussion illustratively, Figure 2 is shown in
terms of stakeholders, directions of cash flows and related items.
Figure 2 Cash Flows among Stakeholders of the Life-long Education Project

Mr. and Mrs. Takushoku (Parents)

(Project Entity)

Taro (Son)

Scholarship

Dir. Costs

Part-time Salary
Tuition
Tax
Schools/Tutors

Government

Private Sector (Shops/Firms/Others)

Source: Author

8


④ Cash Flow Table
Based on ①, ② and ③ above, a cash flow table is completed as Table 2 below.
Table 2 Cash Flows of the Life-long Education Project
(Unit: dollars)
Costs
Tuition/
Years
Direct
Age Entrance
after
Costs
Fee
0
7
6000
0

1
8
6000
0
2
9
6000
0
3 10
6000
0
4 11
6000
0
5 12
6000
0
6 13
7000
0
7 14
7000
0
8 15
7000
0
9 16
8500
0
10 17

8500
0
11 18
8500
0
12 19
10000
0
13 20
10000
0
14 21
10000
0
15 22
10000
0
16 23
0
0
17 24
0
0
18 25
0
0
19 26
0
0
20 27

0
0
21 28
0
0
22 29
0
0
23 30
0
0
24 31
0
0
25 32
0
0
26 33
0
0
27 34
0
0
28 35
0
0
29 36
0
0
30 37

0
0
31 38
0
0
32 39
0
0
33 40
0
0
34 41
0
0
35 42
0
0
36 43
0
0
37 44
0
0
38 45
0
0
39 46
0
0
40 47

0
0
41 48
0
0
42 49
0
0
43 50
0
0
44 51
0
0
45 52
0
0
46 53
0
0
47 54
0
0
48 55
0
0
49 56
0
0
50 57

0
0
51 58
0
0
52 59
0
0
53 60
0
0

Total
Salary
Costs after Tax
6000
6000
6000
6000
6000
6000
7000
7000
7000
8500
8500
8500
10000
10000
10000

10000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
20000
21000
22050
23153

24310
25526
26802
28142
29549
31027
32578
34207
35917
37713
39599
41579
43657
45840
48132
50539
53066
55719
58505
61430
64502
67727
71113
74669
78403
82323
86439
90761
95299
100064

105067
110320
115836
121628

Revenues/Profits
RetirePartScholarment
time
ships
Pay
Income
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
200000
0
0

9

Total
Rev./
Profits
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
20000
21000
22050
23153
24310
25526
26802
28142
29549
31027
32578
34207
35917
37713
39599

41579
43657
45840
48132
50539
53066
55719
58505
61430
64502
67727
71113
74669
78403
82323
86439
90761
95299
100064
105067
110320
115836
321628

Net Rev./
Profits
-6000
-6000
-6000
-6000

-6000
-6000
-7000
-7000
-7000
-8500
-8500
-8500
-10000
-10000
-10000
-10000
20000
21000
22050
23153
24310
25526
26802
28142
29549
31027
32578
34207
35917
37713
39599
41579
43657
45840

48132
50539
53066
55719
58505
61430
64502
67727
71113
74669
78403
82323
86439
90761
95299
100064
105067
110320
115836
321628


⑤ FIRR
Microsoft Excel software is used to calculate the private rate of return (FIRR) for
Taro. In this case, we obtain a FIRR at 0.114 or 11.4%. The result may suggest
that Mr. and Mrs. Takushoku would be pleased with their educational
investment on Taro as it has a fairly satisfactory return.
(3) University Student Project
The case above deals with life-long formal education. But if we segregate the
university education for an individual student from the system and ask ourselves

what is the economic justification for university education, how can we answer? One
of the quantifiable methods of analysis is the cost-profit analysis which aims to
measure its profitability in terms of FIRR. To analyze this case, the following
assumptions are set forth.
① Project Description
Hanako, the daughter of Mr. and Mrs. Takushoku plans to study at a Japanese
university. Hanako as well as her parents think that university education is a
worthwhile investment project from an individual point of view. They believe that
all the private expenses on Hanako’s university education can be more than
compensated by her future earnings. This project is, thus, similar to the second
project above. The only difference, and a kind of difficulty, is how to realize some of
costs and revenues/profits.
② Costs (Cash Out-flows)4
i. Tuition and entrance fee are major items of expenses which are generally borne
by the parents. According to a UFJ bank (a Japanese bank) survey, the average
entrance fee of a Japanese private university in 2003 is 400 thousand yen with
an annual tuition of 1,310 thousand yen.
ii. Foregone earnings, which are equivalent to the 4-year earnings earned by a high
school graduate who did not attend university, are regarded as cost or the
opportunity cost of university education. According to the Japan Statistics Year

Book (2002), the average female high school graduate earns 1,908 thousand yen
per annum at age 19, 1,980 thousand yen at age 20, 2,052 thousand yen at age
21 and 2124 thousand yen at age 22. (Here, we are applying the well-known
notion of “with- and without-project” analysis.5) Income taxes on forgone
earnings as well as on Hanako’s future earnings are costs. However, as far as
the figures above are concerned, they are treated as net of tax. Figure 3 below
helps to understand where the forgone earnings stand.

10

iii. Other direct expenses related to university education such as uniforms,
transportation, books and so on are also counted as costs. In this case, however,
they are negated for simplification of analysis.
③ Revenues/Profits (Cash In-flows)
i. Incremental earnings, the difference between the earnings of a university
graduate and those of a high school graduate illustratively shown in Figure 3,
are

counted

as

revenues/profits,

which

implies

another

“with-

and

without-project” analysis. Statistical data on earnings of female high school and
university graduates are readily available from the same statistical yearbook
quoted above. At age 23, for example, the former earns 2,196 thousand yen per
annum and the latter 2,388 thousand yen, resulting in the difference of 192

thousand yen.
Besides, an incremental retirement severance pay is assumed to be 1,500
thousand yen.
ii. Student scholarships/grants and other assistance can also be treated as
revenues/profits. And, here again, they are assumed zero.

Figure 3 With-University Project and Without-University Project

Earnings of Univ. Graduate

Earnings/Costs

Rev./Profits or Benefits
Earnings of Hi. School Graduate
Forgone Earnings

19

22

65
Direct Costs

0

46

4
Years

Source: Mingat and Tan (1988) and Author

11

Age


④ Cash Flow Table
The discussion on ①, ② and ③ above induces a cash flow table (Table 3), which
simultaneously contains earnings of high school and university graduates as well as
costs and revenues/profits.
Table 3 Cash Flows of the University Student Project (Female Case)
(Unit: thousand yen)
Costs
Earnings of
Hi. School
Age
Graduate
(Female)
19
20
21
22
23
24
25
26
27
28
29

30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59

60
61
62
63
64
65

1908
1980
2052
2124
2196
2276
2356
2436
2510
2585
2659
2734
2808
2899
2990
3082
3173
3264
3334
3403
3473
3542
3612

3696
3780
3864
3948
4032
4087
4142
4198
4253
4308
4351
4394
4438
4481
4524
4514
4505
4495
4486
4476
4423
4370
4318
4265

Revenues/Profits

Earnings
Entrance
of Univ. Fee/ Tuition Forgone Direct Total

Graduate
(Private
Earnings Costs Costs
(Female)
Univ.)
0
0
0
0
2388
2500
2612
2724
2832
2940
3048
3156
3264
3389
3514
3638
3763
3888
3976
4070
4162
4253
4344
4378
4411

4445
4478
4512
4546
4579
4613
4646
4680
4670
4661
4651
4642
4632
4615
4598
4586
4565
4548
4493
4438
4382
4327

1710
1310
1310
1310
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0

1908
1980
2052
2124
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

3618
3290
3362
3434
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0

12

Increment
Net
-al
Incement Student
Total
Revenues
Earnings
-al
ScholarRevenues /Profits
due to
Retireships/
/Profits
Univ.
ment Pay Grants
Education
0
0
-3618
0
0
-3290
0
0

-3362
0
0
-3434
192
192
192
224
224
224
256
256
256
288
288
288
322
322
322
355
355
355
389
389
389
422
422
422
456
456

456
490
490
490
524
524
524
556
556
556
590
590
590
624
624
624
642
642
642
667
667
667
689
689
689
711
711
711
732
732

732
682
682
682
631
631
631
581
581
581
530
530
530
480
480
480
459
459
459
437
437
437
415
415
415
393
393
393
372
372

372
319
319
319
267
267
267
213
213
213
161
161
161
108
108
108
101
101
101
93
93
93
91
91
91
79
79
79
72
72

72
70
70
70
68
68
68
64
64
64
62
1500
1562
1562


⑤ FIRR
Whether Hanako’s university education is justifiable or not can be determined by
the FIRR derived from the column entitled, “Net Revenues/Profits” within Table 3.
We can calculate the FIRR of the project with Microsoft’s IRR software. The FIRR
is 0.011 or 1.1%. This rate is by all means too low to justify economically university
education. Therefore, whether the parents send her to the university or not is
again a matter of judgment. However, it should be reminded that the real value of
university education can only be judged and recognized by taking into account a
variety of externalities which are often and extensively discussed elsewhere.4
Incidentally, in case of the male student, the entire picture is quite different. The
FIRR of a male student is 0.051 or 5.1% which is calculated from Table A-1,
Appendix A, whose data are also obtained from the same statistical yearbook. The
rate is relatively high and proves, at least in terms of FIRR, that university
education for male is a better investment than that for female.

4. Cost-Benefit Analysis of Education Sector Projects
We now proceed to the Cost-Benefit Analysis. As we have pointed out, this analysis
is meant for the public sector project whose main concern is to estimate the impact on
the economic growth for the country as a whole. The education project to which this
analysis is applicable, therefore, identifies its impacts on consumption and production
of wealth of the national economy as a whole, not from the private point of view but
from the public/government point of view. Take benefit, for example. Benefit is
required to measure actual economic productivity increase rather than sheer
incremental earnings. With this fundamental understanding in mind, the following
case studies illustrate the specific mechanics of the analysis.
There are two kinds of cost-benefit analysis: at financial prices (hereinafter referred
to as Financial Cost-Benefit Analysis or FCBA) and at economic prices (hereinafter
referred to as Economic Cost-Benefit Analysis or ECBA). The difference between the
two is that the former is carried out in terms of financial prices, namely the prevailing
market prices within the domestic market, and the latter in terms of economic prices,
namely the true-value-reflected prices such as international prices, border prices,
willingness-to-pay prices and so on. Public investment projects undergo FCBA first
and, then, ECBA in sequence through the conversion processes. Within the
framework of the cost-benefit analysis, FCBA is called “Financial Analysis” as a
means to distinguish FCBA from ECBA, which is a little misleading. We should
always keep in mind that the true financial analysis is the Cost-Profit Analysis

13


discussed above. Needless to say, costs and benefits to be included in this analysis
differ substantially from costs and revenues/profits in the cost-profit analysis.
To illustrate the specific mechanics of the analyses, a hypothetical university project
is formulated.
(1) Financial Cost-Benefit Analysis (FCBA) of the Bintang University Project

The planned Bintang University Project is to be implemented under the following
assumptions.
① Project Description
The government of an upper-middle-income developing country7 plans to
establish a new national university, called Bintang University. This university
will specialize in socio-economic development studies and will educate future
leaders of the country.
The university construction takes the first full year and actual teaching starts in
the following year. The university accommodates 1,000 students with a
throughput of 250 graduates a year in the steady state. The university begins to
hire its teaching and office staffs at the end of the first year and continues hiring
as the intake of students rises. The student population increases from 250 in the
project’s second year and reaches 1,000 in its fifth and fully operational year. The
project life is 31 years including the construction period, which means that the
university is closed at the end of the 31st year.
② Costs (Cash Out-flows)
The physical construction costs, which occupy the main share of the project’s
investment, are broken down into several items in accordance with their
respective markets such as goods, services, labor, land and so on. These items are,
then, individually divided into a traded goods/services (or foreign currency)
component and a non-traded goods/services (or local currency) component. This
practice is indispensable in converting financial costs/benefits in FCBA into
economic costs/benefits in ECBA.
i. Construction Costs
ⓐ Equipment and materials cost are 5 million dollars, of which 2 million
dollars represent the foreign currency component (traded goods) and 3
million dollars the local currency component (non-traded goods).
ⓑ Labor costs count for 900 thousand dollars, of which 300 thousand dollars
represents the foreign currency component (trained labor) and 600
thousand dollars the local currency component (untrained labor).

ⓒ Land costs 600 thousand dollars (local currency component).

14


ⓓ Consulting services cost 250 thousand dollars, of which 100 thousand
dollars represents costs for foreign consultants and 150 thousand dollars for
the local consultants.
ⓔ Taxes amount to 200 thousand dollars, of which 80 thousand dollars is paid
by foreign companies and 120 thousand dollars is paid by the local
companies.
ⓕ Base Costs are the sum of ⓐ, ⓑ, ⓒ, ⓓ and ⓔ above, which represents
the sub-total.
ⓖ Physical contingency is equal to 5% of the base costs or the subtotal above.
ⓗ Total costs except price contingency are the sum of the base costs (ⓕ
above) and the physical contingency (ⓖ above).
ⓘ Price contingency is a construction cost item and is usually calculated on
the basis of annual costs allocation and inflationary trend during the
construction period from a few to several years. Usually inflation rates are
separately set for the foreign currency components (3%, for example) and
local currency components (8%, for example). In our present case, as the
construction completes within a year, this calculation is not necessary.
Price contingency is not used for IRR calculation, but it is included in
the total costs of construction for the sake of determining real needs of
funds and the loan amount.
ⓙ The grand total costs are the sum of ⓗ and ⓘ.
ii. Salaries and Other Recurrent Costs
In the first teaching year, the university is operated with a total of 20 teaching
and office staffs. From the third year, 10 staffs are added every year until the
total number reaches 50 at the beginning of the fifth year. Total staff cost for

the university is 50 thousand dollars per person per annum. All 50 staffs
remain employed until the end of the 31st year.
iii. Forgone Earnings
While attending the university each student forgoes 11 thousand dollars
potential annual earnings. In the fourth year of the project, for example, when
the university has 750 students, the aggregate cost in forgone earnings
amounts to 8.25 (11,000×750) million dollars.
iv. Private University-related Expenses
For the sake of simplification, these expenses (uniforms, transportation, books
and the like) are assumed as not accruing.
v. Operation and Maintenance (O&M) Costs

15


From the second year of the project, 3% of the total costs excluding price
contingency (“ i-ⓗ” above) are spent on O&M of buildings and facilities annually
through to the 31st year (year 30) of the project.
③ Benefits (Cash In-flows)
i. Productivity Increase
It is expected that university education increases graduates’ productivity over
their entire lifetime. To measure the incremental productivity, the difference
between the earnings of university graduates (namely, in the case of
“with-project”)

and

those

of

high

school

graduates

“without-project”), as shown in Figure 3, is used as a

(in

the

case

of

proxy.8

Generally speaking, the difference in earnings gradually grows and hits a
ceiling towards the end of their work career. But in our present case, we simply
fix it at 6,000 dollars per person per annum through to the retirement age of 65.
Besides, every university graduate receives an incremental retirement
severance pay of 75 thousand dollars.
ii. Scrap/Salvage Value
When the university is closed, it retains certain valuable assets. The only valued
asset left, in this case, is the land. Its market value is 600 thousand dollars,
which is the same at the time of the initial investment.
④ Cash Flow Table
In preparing the cash flow table, a step-by-step approach is utilized. In other

words, an individual cash flow table for every item of costs and benefits listed
above is prepared and, then, all the tables are integrated into one final cash flow
table.
The eight individual tables, whose headings are listed below, are tabulated as
shown in the Appendix B.
Table B-1: Construction Costs
Table B-2: Salaries and Other Recurrent Costs
Table B-3: Forgone Earnings
Table B-4: Other Private University-related Expenses
Table B-5: Operation and Maintenance Costs
Table B-6: Productivity Increase (Annual Earnings)
Table B-7: Productivity Increase (Retirement Pay)
Table B-8: Scrap/Salvage Value
Those tables are merged into one final cash flow table, Table 4-1 shown below.
⑤ Net Present Value (NPV) and Benefit/Cost Ratio (B/C Ratio) Table

16


To determine the “benefitability” of the project from two different angles other
than IRR values, NPVs and B/C Ratios are also calculated from the NPV and B/C
Ratio table (Table 4-2) at the given discount rates of 8% and 10%.
⑥ EIRR, NPV and B/C Ratio
The FCBA of the Bintang university project produces three kinds of values: EIRR,
NPV and B/C Ratio. The EIRR can easily be calculated from the “Net Benefits”
summarized in the right edge column of Table 4-1. Utilizing the Microsoft Excel
IRR program, we obtain the EIRR value of 0.0897 or 8.97%. Table 4-2 tabulates
the present values of costs and benefits and, for this reason, the discount factors
are inserted until the last batch of graduates completes their work career over a
73 year period. At the given discount rate of 8%, we then obtain: 1) the NPV of

19.99 million dollars by adding all the present values in the seventh column (“Net
Present Value”), and 2) the B/C Ratio of 1.14 by calculating the ratio between the
total of present values of costs in the fifth column (“Present Value of Costs”) and
the total of present values of benefits in the sixth column (“Present Value of
Benefits”). Similarly, we can obtain, at the given discount rate of 10%, a NPV of
－(minus)14.37 million dollars and a B/C Ratio of 0.88.
Whether or not these values are high enough to make an investment decision is
a matter of judgment. However, what needs to be reiterated more importantly
here is the fact that FCBA is a preparatory stage to ECBA, and FCBA is carried
out at the financial prices and ECBA is carried out at the economic prices. This
may raise the question concerning validity of FCBA. In other words, if ECBA is
the final goal, what is the use of FCBA? FCBA does, however, have its own
advantages. One of them is derived from the fact that financial prices are the
market prices that we perceive in our daily life. They are readily available and
easy to quote for analysis. Therefore, we can quickly obtain EIRR, NPV and B/C
Ratio. On the other hand, economic prices are converted and computed prices
whose calculation is often difficult which hamper practical execution of analytical
works. Another advantage of financial prices is that they are equally recognized
by anyone and, therefore, have proved to be an acceptable and non-deniable
aspect of FCBA. The analytical results obtained above, thus, can be of valuable
help in making a decision on the Bintang university project.
FCBA is, thus, fundamentally the economic analysis and, therefore, its IRR has
to be called EIRR or more precisely EIRR at financial prices. Within the
framework of cost-benefit analysis, however, FCBA is often treated as the
Financial Analysis and its IRR is called FIRR. The logic behind this may be that

17


the analysis deals with the prevailing domestic market prices and all transfer

items are not necessarily excluded, which resembles cost-profit analysis slightly.
We should be reminded once again that the terms, “financial analysis” and
“FIRR”, referred here are definitely different from those of the true financial
analysis, namely, the cost-profit analysis discussed in the previous section,“3.
Cost-Profit Analysis of Education Sector Projects”.
Table 4-1 Cash Flows of the Bintang University Project at Financial Prices
(Unit: thousand dollars)
Costs

Benefits

Initial
Investment
Salaries
O&M Costs
Years (Base Costs
Forgone Private
and Other
(3% of Initial
after plus Physical
Eranings Expenses
Costs
Investment)
Contingency)
0
1
2
3
4
5

6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35

36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57

7298
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
1000
1500
2000
2500

2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500

0
2750
5500

8250
11000
11000
11000
11000
11000
11000
11000
11000
11000
11000
11000
11000
11000
11000
11000
11000
11000
11000
11000
11000
11000
11000
11000
11000
8250
5500
2750

0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
219
219
219
219
219
219
219
219
219
219
219
219
219
219
219
219
219
219
219
219
219
219
219
219
219
219
219
219

219
219

18

Total
Costs

7298
3969
7219
10469
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719

13719
13719
13719
13719
13719
13719
10969
8219
5469

ProducProducNet
tivity
Scrap/
tivity
Total
Benefits
Increase Salvage
Increase
Benefits
(Retire- Value
(Earnings)
ment Pay)
0
0
0
0
0
1500
3000
4500

6000
7500
9000
10500
12000
13500
15000
16500
18000
19500
21000
22500
24000
25500
27000
28500
30000
31500
33000
34500
36000
37500
39000
40500
40500
40500
40500
40500
40500
40500

40500
40500
40500
40500
40500
40500
40500
40500
40500
40500
39000
37500
36000
34500
33000
31500
30000
28500
27000
25500

0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
18750
18750
18750
18750
18750
18750
18750
18750
18750
18750
18750

0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
600

0
0
0
0
0
1500
3000
4500

6000
7500
9000
10500
12000
13500
15000
16500
18000
19500
21000
22500
24000
25500
27000
28500
30000
31500
33000
34500
36000
37500
39600
40500
40500
40500
40500
40500
40500
40500

40500
40500
40500
40500
40500
40500
40500
40500
40500
59250
57750
56250
54750
53250
51750
50250
48750
47250
45750
44250

-7298
-3969
-7219
-10469
-13719
-12219
-10719
-9219
-7719

-6219
-4719
-3219
-1719
-219
1281
2781
4281
5781
7281
8781
10281
11781
13281
14781
16281
17781
19281
20781
25031
29281
34131
40500
40500
40500
40500
40500
40500
40500
40500

40500
40500
40500
40500
40500
40500
40500
40500
59250
57750
56250
54750
53250
51750
50250
48750
47250
45750
44250


58
59
60
61
62
63
64
65
66

67
68
69
70
71
72
73

24000
22500
21000
19500
18000
16500
15000
13500
12000
10500
9000
7500
6000
4500
3000
1500

18750
18750
18750
18750
18750

18750
18750
18750
18750
18750
18750
18750
18750
18750
18750
18750

42750
41250
39750
38250
36750
35250
33750
32250
30750
29250
27750
26250
24750
23250
21750
20250

Table 4-2 NPV and B/C Ratio of the Bintang University Project at Financial

Prices
(Unit: thousand dollars)
Discount
Discount Present
Years Total Total
Factor
Value of
after Costs Benefits
1/(1+0.08)^ Costs
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49

7298
3969
7219
10469
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
13719
10969
8219

5469

0
0
0
0
0
1500
3000
4500
6000
7500
9000
10500
12000
13500
15000
16500
18000
19500
21000
22500
24000
25500
27000
28500
30000
31500
33000
34500

36000
37500
39600
40500
40500
40500
40500
40500
40500
40500
40500
40500
40500
40500
40500
40500
40500
40500
40500
59250
57750
56250

1.0000
0.9259
0.8573
0.7938
0.7350
0.6806
0.6302

0.5835
0.5403
0.5002
0.4632
0.4289
0.3971
0.3677
0.3405
0.3152
0.2919
0.2703
0.2502
0.2317
0.2145
0.1987
0.1839
0.1703
0.1577
0.1460
0.1352
0.1252
0.1159
0.1073
0.0994
0.0920
0.0852
0.0789
0.0730
0.0676
0.0626

0.0580
0.0537
0.0497
0.0460
0.0426
0.0395
0.0365
0.0338
0.0313
0.0290
0.0269
0.0249
0.0230

7298
3675
6189
8311
10084
9337
8645
8005
7412
6863
6355
5884
5448
5044
4671
4325

4004
3708
3433
3179
2943
2725
2523
2337
2163
2003
1855
1717
1271
882
543
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0

Rate: 8%
Present
Value of
Benefits
0
0
0
0
0
1021
1891
2626
3242
3752
4169
4503
4765
4964
5107
5201
5254
5270
5255
5214
5149

5066
4966
4854
4731
4600
4462
4319
4173
4025
3935
3727
3451
3195
2958
2739
2536
2348
2174
2013
1864
1726
1598
1480
1370
1269
1175
1591
1436
1295

19

Discount Rate: 10%
Net
Discount Present Present
Net
Present
Factor Value of Value of Present
Value 1/(1+0.1)^ Costs Benefits Value
-7298
-3675
-6189
-8311
-10084
-8316
-6755
-5379
-4170
-3111
-2186
-1381
-683
-80
436
877
1250
1562
1822
2035
2206

2340
2443
2517
2568
2596
2607
2602
2901
3143
3392
3727
3451
3195
2958
2739
2536
2348
2174
2013
1864
1726
1598
1480
1370
1269
1175
1591
1436
1295

1.0000
0.9091
0.8264
0.7513
0.6830
0.6209
0.5645
0.5132
0.4665
0.4241
0.3855
0.3505
0.3186
0.2897
0.2633
0.2394
0.2176
0.1978
0.1799
0.1635
0.1486
0.1351
0.1228
0.1117
0.1015
0.0923
0.0839
0.0763
0.0693
0.0630

0.0573
0.0521
0.0474
0.0431
0.0391
0.0356
0.0323
0.0294
0.0267
0.0243
0.0221
0.0201
0.0183
0.0166
0.0151
0.0137
0.0125
0.0113
0.0103
0.0094

7298
3608
5966
7865
9370
8518
7744
7040
6400

5818
5289
4808
4371
3974
3613
3284
2986
2714
2467
2243
2039
1854
1685
1532
1393
1266
1151
1046
761
518
313
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
931
1693
2309
2799
3181
3470
3680
3824
3910
3950
3950
3917
3858

3777
3679
3567
3446
3317
3183
3046
2907
2769
2632
2496
2364
2269
2110
1918
1744
1585
1441
1310
1191
1083
984
895
813
740
672
611
556
505
672

595
527

-7298
-3608
-5966
-7865
-9370
-7587
-6051
-4731
-3601
-2637
-1819
-1128
-548
-63
337
666
932
1144
1310
1436
1528
1592
1632
1651
1653
1641
1618

1585
1736
1846
1956
2110
1918
1744
1585
1441
1310
1191
1083
984
895
813
740
672
611
556
505
672
595
527

42750
41250
39750
38250
36750
35250

33750
32250
30750
29250
27750
26250
24750
23250
21750
20250


50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67

68
69
70
71
72
73

54750
53250
51750
50250
48750
47250
45750
44250
42750
41250
39750
38250
36750
35250
33750
32250
30750
29250
27750
26250
24750
23250
21750

20250

0.0213
0.0197
0.0183
0.0169
0.0157
0.0145
0.0134
0.0124
0.0115
0.0107
0.0099
0.0091
0.0085
0.0078
0.0073
0.0067
0.0062
0.0058
0.0053
0.0049
0.0046
0.0042
0.0039
0.0036

0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

1167
1051
946
851
764
686
615
551

492
440
393
350
311
276
245
217
191
169
148
130
113
98
85
74

1167
1051
946
851
764
686
615
551
492
440
393
350
311

276
245
217
191
169
148
130
113
98
85
74

0.0085
0.0077
0.0070
0.0064
0.0058
0.0053
0.0048
0.0044
0.0040
0.0036
0.0033
0.0030
0.0027
0.0025
0.0022
0.0020
0.0019
0.0017

0.0015
0.0014
0.0013
0.0012
0.0010
0.0010

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0

466
412
364
322
284
250
220
193
170
149
131
114
100
87
76
66
57
49
43
37
31
27
23
19

466
412
364

322
284
250
220
193
170
149
131
114
100
87
76
66
57
49
43
37
31
27
23
19

(2) Economic Cost-Benefit Analysis (ECBA) of the Bintang University Project
We are now in a position to analyze the Bintang university project from the
economic point of view. The major task here is to change the financial prices into
economic prices.
① Steps to Convert Financial Cash Flows into Economic Cash Flows
In general, there are three steps to obtain economic cash flows, namely:
i. To eliminate transfer items such as tax and subsidy from the flows, as they are
not related with actual consumption or production of the economy; they are

sheer transfers from someone’s hand to someone else’s hand.
ii. To adjust the domestic market prices of traded goods and services into the
international prices.
iii. To adjust the domestic market prices of non-traded goods and services into
economic prices by applying such coefficients as conversion factors9,
willingness-to-pay prices and long-term marginal costs.
② Economic Costs (Cash Out-flows)
i. Construction Costs
ⓐ With regards to the 5 million dollars of equipment and materials costs, 2
million dollars (foreign currency component or traded goods/services) are
counted as economic costs as they are spent on internationally traded
goods/services. The remaining 3 million dollars (local currency component
or

non-traded

goods/services)

are

spent

on

domestically

traded

goods/services and are thus converted into economic costs with a
conversion factor of 0.9.

ⓑ Similarly as above, out of the labor costs of 900 thousand dollars, 300

20


thousand dollars (foreign currency component or traded goods/services) are
treated as economic costs and the remaining 600 thousand dollars (local
currency component or non-traded goods/services) are converted into
economic costs with a conversion factor of 0.6.
ⓒ The land costs 600 thousand dollars (local currency component or
non-traded goods/services) in the domestic market. This land, however, can
be used alternatively as agricultural land, whose opportunity cost is worth
500 thousand dollars, in present value terms, of agricultural products to be
harvested over the 30 years of the project.
ⓓ Out of 250 thousand dollars of consulting services, 100 thousand dollars
(foreign currency component or traded goods/services) are spent on foreign
consultants and regarded as economic costs. The remaining 150 thousand
dollars (local currency component or non-traded goods/services) for local
consultants are converted into economic costs with a conversion factor of
0.9.
ⓔ Taxes belong to the transfer item and, therefore, is simply eliminated from
the table.
ⓕ Base costs are then the sum of ⓐ,ⓑ,ⓒ and ⓓ above, which is usually
captioned as the sub-total. They are to be separately summed in both the
“Foreign Currency or Traded Goods/Services” and “Local Currency
Component or Non-traded Goods/Services” columns. The transfer item ⓔ
is not logically included.
ⓖ Physical contingency is calculated on the basis of 5% of the base costs ⓕ
above.
ⓗ As the grand total economic costs, the base costs and the physical

contingency are added.
ii. Salaries and Other Recurrent Costs
As teaching and office staffs are recruited from the fairly competitive domestic
as well as international market, the financial costs are regarded equal to the
economic costs. In other words, a conversion factor of 1 (one) is applied.
iii. Forgone Earnings
The salary level of the high school graduate is valued higher than its real
value. Therefore, a conversion factor of 0.9 is applied to revaluate the real
forgone earnings which are the economic costs. In the forth year of the project,
for example, when the university has 750 students, aggregate cost in forgone
earnings amounts to 7,425 (11,000×0.9×750) thousand dollars.

21


iv. Private University-related Expenses
For simplification, these expenses are assumed as not accruing.
v. Operation and Maintenance (O&M) Costs
From the second year on, 3% of the total construction costs (i-ⓗ above) are
spent on O&M of buildings and facilities annually through to the 31st year
(year 30).
③ Economic Benefits (Cash In-flows)
i. Productivity Increase (Earnings)
The incremental productivity is measured in the same manner as in the case of
the FCBA. As earnings of the university graduate are determined in a highly
competitive market and its level is as high as the international level, financial
earnings are deemed equal to economic earnings. On the other hand, high
school graduate’s earnings are valued lower (a conversion rate of less than 1 is
to be applied) in terms of economic prices. Here we simply widen the
productivity gap from 6 thousand dollars per person per annum to 7.1

thousand dollars.
Similarly, the incremental retirement severance pay is increased from 75
thousand dollars per person per annum to 89 thousand dollars.
ii. Scrap/Salvage Value
The land is assumed to be the only valued asset left when the university is
closed at the end of the 31st year. This land is sold at the economic price of 500
thousand dollars calculated by the same token as ②-i-ⓒ.
④ Cash Flow Table
An individual cash flow table for every item of cost and benefit discussed above
is created. The following eight tables are tabulated independently in Appendix
C.
Table C-1: Construction Costs (Economic Prices)
Table C-2: Salaries and Other Recurrent Costs (Economic Prices)
Table C-3: Forgone Earnings (Economic Prices)
Table C-4: Private University-related Expenses (Economic Prices)
Table C-5: O&M Costs (Economic Prices)
Table C-6: Productivity Increase (Earnings at Economic Prices)
Table C-7: Productivity Increase (Retirement Pay at Economic Prices)
Table C-8: Scrap/Salvage Value (Economic Prices)
All the above tables are subsequently integrated into one final cash flow table
(Table 4-3)

22


⑤ Net Present Value (NVP) and Benefit/Cost Ratio (B/C Ratio) Table
From Table 4-3, the “Total Costs” and “Total Benefits” columns are selected as
the basic data for analyzing NPV and B/C Ratio. In our present case, two
discount rates are given once again at 8% and 10%. We can then obtain the NPV
and B/C Ratio table (Table 4-4).

⑥ EIRR, NPV and B/C Ratio
Microsoft Excel IRR software is utilized to analyze the data presented in Table
4-3, the first column on the right (“Net Benefits”), which results in EIRR of 0.111
or 11.1 %. We can assume that this rate may be judged as being quite satisfactory
for the public authorities when determining to implement or not the Bintang
university project.
Likewise, NPV is 61.9 million dollars and B/C Ratio is 1.47 when the given
discount rate is 8%. Further, when the given discount rate is 10%, NPV is 14.9
million dollars and B/C Ratio is 1.14. In both cases, NPV shows positive values
and B/C Ratio is larger than one. This implies that the project clears a certain
standard criteria of return such as 10%, which strongly supports recommending
the project for implementation.
Table 4-3 Cash Flows of the Bintang University Project at Economic Prices
Costs
Initial
Years
Investafter
ment
0
1
2
3
4
5
6
7
8
9
10
11

12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32

6347
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

Salaries
Private O&M Costs
and
Forgone
Expen- (3% of Initial
Other Earnings

ses Investment)
Costs
0
1000
1500
2000
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500
2500

2500
2500
2500

0
2475
4950
7425
9900
9900
9900
9900
9900
9900
9900
9900
9900
9900
9900
9900
9900
9900
9900
9900
9900
9900
9900
9900
9900
9900

9900
9900
7425
4950
2475

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0

0
190
190
190
190
190
190
190
190
190
190
190
190
190
190
190
190
190
190
190
190
190

190
190
190
190
190
190
190
190
190

23

Total
Costs
6347
3665
6640
9615
12590
12590
12590
12590
12590
12590
12590
12590
12590
12590
12590
12590

12590
12590
12590
12590
12590
12590
12590
12590
12590
12590
12590
12590
10115
7640
5165

(Unit: thousand dollars)
Benefits
ProductProductScrap/
Net
ivity
ivity
Salvage
Total Benefits
Increase
Increase
Value Benefits
(Retire.
(Earnings)
(Total)

Pay)
0
0
0
0
0
1775
3550
5325
7100
8875
10650
12425
14200
15975
17750
19525
21300
23075
24850
26625
28400
30175
31950
33725
35500
37275
39050
40825
42600

44375
46150
47925
47925

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
500

0
0
0
0
0
1775
3550
5325
7100
8875
10650
12425
14200
15975
17750
19525
21300
23075
24850

26625
28400
30175
31950
33725
35500
37275
39050
40825
42600
44375
46650
47925
47925

-6347
-3665
-6640
-9615
-12590
-10815
-9040
-7265
-5490
-3715
-1940
-165
1610
3385
5160

6935
8710
10485
12260
14035
15810
17585
19360
21135
22910
24685
26460
28235
32485
36735
41485
47925
47925


33
34
35
36
37
38
39
40
41
42

43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72

73

47925
47925
47925
47925
47925
47925
47925
47925
47925
47925
47925
47925
47925
47925
47925
46150
44375
42600
40825
39050
37275
35500
33725
31950
30175
28400
26625
24850

23075
21300
19525
17750
15975
14200
12425
10650
8875
7100
5325
3550
1775

0
0
0
0
0
0
0
0
0
0
0
0
0
0
22250
22250

22250
22250
22250
22250
22250
22250
22250
22250
22250
22250
22250
22250
22250
22250
22250
22250
22250
22250
22250
22250
22250
22250
22250
22250
22250

47925
47925
47925
47925

47925
47925
47925
47925
47925
47925
47925
47925
47925
47925
70175
68400
66625
64850
63075
61300
59525
57750
55975
54200
52425
50650
48875
47100
45325
43550
41775
40000
38225
36450

34675
32900
31125
29350
27575
25800
24025

47925
47925
47925
47925
47925
47925
47925
47925
47925
47925
47925
47925
47925
47925
70175
68400
66625
64850
63075
61300
59525
57750

55975
54200
52425
50650
48875
47100
45325
43550
41775
40000
38225
36450
34675
32900
31125
29350
27575
25800
24025

Table 4-4 NPV and B/C Ratio of the Bintang University Project at Economic
Prices

Years
after
0
1
2
3
4

5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23

Discount Rate: 8%
Discount
Present Present
Net
Total
Total
Factor
Value of Value of Present
Costs Benefits
1/(1+0.08)^

Costs
Benefits Value
6347
3665
6640
9615
12590
12590
12590
12590
12590
12590
12590
12590
12590
12590
12590
12590
12590
12590
12590
12590
12590
12590
12590
12590

0
0
0

0
0
1775
3550
5325
7100
8875
10650
12425
14200
15975
17750
19525
21300
23075
24850
26625
28400
30175
31950
33725

1.0000
0.9259
0.8573
0.7938
0.7350
0.6806
0.6302
0.5835

0.5403
0.5002
0.4632
0.4289
0.3971
0.3677
0.3405
0.3152
0.2919
0.2703
0.2502
0.2317
0.2145
0.1987
0.1839
0.1703

6347
3394
5693
7633
9254
8569
7934
7346
6802
6298
5832
5400
5000

4629
4287
3969
3675
3403
3151
2917
2701
2501
2316
2144

0
0
0
0
0
1208
2237
3107
3836
4440
4933
5329
5639
5874
6043
6155
6217
6236

6219
6169
6093
5994
5877
5744

24

-6347
-3394
-5693
-7633
-9254
-7361
-5697
-4239
-2966
-1859
-899
-71
639
1245
1757
2186
2542
2834
3068
3252
3392

3493
3561
3600

(Unit: thousand dollars)
Discount Rate: 10%
Discount
Present Present
Net
Factor
Value of Value of Present
1/(1+0.1)^
Costs
Benefits
Value
1.0000
0.9091
0.8264
0.7513
0.6830
0.6209
0.5645
0.5132
0.4665
0.4241
0.3855
0.3505
0.3186
0.2897
0.2633

0.2394
0.2176
0.1978
0.1799
0.1635
0.1486
0.1351
0.1228
0.1117

6347
3332
5488
7224
8599
7818
7107
6461
5874
5340
4854
4413
4012
3647
3315
3014
2740
2491
2264
2059

1871
1701
1547
1406

0
0
0
0
0
1102
2004
2733
3312
3764
4106
4355
4525
4627
4674
4674
4636
4565
4469
4353
4221
4078
3925
3766

-6347
-3332
-5488
-7224
-8599
-6716
-5103
-3728
-2561
-1576
-748
-58
513
980
1359
1660
1895
2074
2205
2295
2350
2376
2378
2360


24
25
26
27

28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57

58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73

12590
12590
12590
12590
10115
7640
5165

35500
37275
39050
40825
42600

44375
46650
47925
47925
47925
47925
47925
47925
47925
47925
47925
47925
47925
47925
47925
47925
47925
47925
70175
68400
66625
64850
63075
61300
59525
57750
55975
54200
52425
50650

48875
47100
45325
43550
41775
40000
38225
36450
34675
32900
31125
29350
27575
25800
24025

0.1577
0.1460
0.1352
0.1252
0.1159
0.1073
0.0994
0.0920
0.0852
0.0789
0.0730
0.0676
0.0626
0.0580

0.0537
0.0497
0.0460
0.0426
0.0395
0.0365
0.0338
0.0313
0.0290
0.0269
0.0249
0.0230
0.0213
0.0197
0.0183
0.0169
0.0157
0.0145
0.0134
0.0124
0.0115
0.0107
0.0099
0.0091
0.0085
0.0078
0.0073
0.0067
0.0062
0.0058

0.0053
0.0049
0.0046
0.0042
0.0039
0.0036

1986
1838
1702
1576
1173
820
513
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

5598
5443

5280
5111
4938
4763
4636
4410
4083
3781
3501
3241
3001
2779
2573
2383
2206
2043
1891
1751
1621
1501
1390
1885
1701
1534
1383
1245
1121
1007
905
812

728
652
583
521
465
414
369
328
290
257
227
200
176
154
134
117
101
87

3613
3604
3577
3535
3765
3943
4123
4410
4083
3781
3501

3241
3001
2779
2573
2383
2206
2043
1891
1751
1621
1501
1390
1885
1701
1534
1383
1245
1121
1007
905
812
728
652
583
521
465
414
369
328
290

257
227
200
176
154
134
117
101
87

0.1015
0.0923
0.0839
0.0763
0.0693
0.0630
0.0573
0.0521
0.0474
0.0431
0.0391
0.0356
0.0323
0.0294
0.0267
0.0243
0.0221
0.0201
0.0183
0.0166

0.0151
0.0137
0.0125
0.0113
0.0103
0.0094
0.0085
0.0077
0.0070
0.0064
0.0058
0.0053
0.0048
0.0044
0.0040
0.0036
0.0033
0.0030
0.0027
0.0025
0.0022
0.0020
0.0019
0.0017
0.0015
0.0014
0.0013
0.0012
0.0010
0.0010

1278
1162
1056
960
701
482
296
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

3604
3440
3277
3114
2954
2797
2673
2497

2270
2063
1876
1705
1550
1409
1281
1165
1059
963
875
796
723
657
598
796
705
624
552
488
432
381
336
296
261
229
201
177
155
135

118
103
90
78
68
58
50
43
37
32
27
23

2326
2278
2220
2154
2253
2316
2377
2497
2270
2063
1876
1705
1550
1409
1281
1165
1059

963
875
796
723
657
598
796
705
624
552
488
432
381
336
296
261
229
201
177
155
135
118
103
90
78
68
58
50
43
37

32
27
23

5. Conclusion
By defining financial analysis and economic analysis in a narrow sense, the
cost-profit analysis and the cost-benefit analysis were undertaken for the
hypothetical cases presented above. The first three cases were those to which the
cost-profit analysis could only be applied, while the last case was where the
cost-benefit analysis was applicable. Here it is claimed that analytical procedures and
steps have been clarified in an ever-more practical manner. In other words, they can
be used immediately and straightforwardly for actual project cases.
In addition to this practical aspect, this paper has identified that scholars and
practitioners tend to use the terms “Financial Analysis and FIRR” without defining
them rigidly. True financial analysis means that pure cost-profit analysis and,
therefore, FIRR is the result of cost-profit analysis. However, within the framework of
cost-benefit analysis, the terms “Financial Analysis and FIRR” are often used for
financial cost-benefit analysis (FCBA), while the terms “Economic Analysis and

25