The Structure Of An Economic And Financial Analysis

By Author: Fabiola Groshan
Total Articles: 2671
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Economic and financial analysis has many purposes and aims, depending on the field and area that is designed for, but generally it is meant to help people determine the balance between the costs and benefits of a certain project, so that the project cycle can run smoothly and all the right decisions are made. When structuring such a complex and detailed analysis, one should take into consideration recent economic news, so that the analysis is realistic and adjustable to present needs or demands. The analysis has two major features, both of them essential to an accurate assessment, quantitative measures and qualitative ones. The quantitative measures refer of course to costs and aspects that have a more obvious value, while the measures of qualitative nature are significant due to the fact that many costs and benefits, especially social ones, can not be quantify and their value can not be expressed in any currency. Furthermore, it is the social benefits, or better yet the socioeconomic ones, that attract investors nowadays, in this present economic climate.

To that extent, the economic and financial analysis has as main ...
... purpose the accurate identification of costs and risks involved in a project or a proposal, as well as to point out the benefits, either direct or flow-on. Obviously, such an analysis is comprised of two parts, the financial analysis and the economic one, having different objectives, which can sometime lead to a proposal being economically viable, as seen by the society and the government as a whole, but not financially viable, because it does not show positive net present value. However, certain steps are taken when constructing such an analysis, the very first one being the conversion of targeted market to accounting prices, which refers to the prices that are set by the market, but that many times are not a good reflection of the opportunity cost. Recent economic news are important to this analysis because the next step in its structure is factoring in indirect effects and trying to discount the costs and benefits that were previously estimated. This is necessary because the costs and benefits that are valid in the present have a totally different value in the future.

There are several indicators that are used to asses and rate the value and validity of a project, which are included in the economic and financial analysis. Financially, there are two such measures, the financial net present value, which is the difference between the expected revenues and the investment and operating costs, and the financial rate of return, which is a way to quantify the revenues' capacity of remunerating the initial investment. Economically, there are three such indicators, the economic net present value, the economic internal rate of return and the B/C ratio. The ENPV is calculated as the difference between social benefits and social costs, while the ERR is the rate for which the ENPV is zero.

Recent economic news have taught us that it is always important to acknowledge the precise impact of a certain economic project or program on the society, a community or a particular entity and this is why it is necessary to make use of an economic and financial analysis,as well as for when a certain project is very large in size compared with the national economy.

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