What Is Economic Evaluation?
Economic evaluation funds are limited. In order to save and effectively use investment, economic benefits must be emphasized. Before making investment decisions, feasibility studies must be conducted carefully, and the economic benefits of investment projects must be calculated and analyzed. When more than one option is available, the economic benefits of each option must be compared and selected. This process of analysis and demonstration is called project economic evaluation.
- Chinese name
- Economic evaluation
- Foreign name
- economicappraisal
- Part of speech
- noun
- Pinyin
- jing ji ping jia
- Economic evaluation funds are limited. In order to save and effectively use investment, economic benefits must be emphasized. Before making investment decisions, feasibility studies must be conducted carefully, and the economic benefits of investment projects must be calculated and analyzed. When more than one option is available, the economic benefits of each option must be compared and selected. This process of analysis and demonstration is called project economic evaluation.
Definition of Economic Evaluation
- Economic evaluation refers to assessing whether the audited unit's plans, budgets, decisions, and plans are advanced and feasible and whether economic activities are carried out according to the established goals after auditing the audited unit's finances, financial revenues and expenditures and related economic activities The level of economic benefits is good or bad, and whether the internal control system is sound and effective, etc., so as to make targeted comments and suggestions, the purpose is to promote its improvement of management and economic benefits.
- Including national economic evaluation, engineering project economic evaluation, technical and economic evaluation, etc. [1] .
Characteristics of economic evaluation
- The economic evaluation should be based on the examination of the audit object. Only when the truth of the objective facts is found, can an objective and fair evaluation be made. The economic evaluation should closely combine the affirmative achievements, find problems, and make suggestions. Only in this way can the economic evaluation function be brought into full play.
Common methods of economic evaluation
Economic evaluation static evaluation
- Regardless of the time value of the funds, it is mainly used for the rough analysis and evaluation of the initial stage of the project feasibility study, and the preliminary selection of technical solutions.
- A. Static investment payback period method (time indicator) .
- Related concepts: The static investment payback period, as an indicator that reflects the economics and risk of the technical solution, has a unique status and role in the evaluation of construction projects, and is widely used as an auxiliary indicator for construction project evaluation.
- Steps: (1) Calculation of investment payback period (2) Calculation of average annual net income (3) Calculation of static investment payback period from the financial cash flow statement
- Significance: It reflects the profitability of the scheme and is related to the actual income of each year. The larger the income, the faster the recovery, and the shorter the recovery period.
- Method evaluation:
- advantage:
- 1. The economic meaning is intuitive and clear, and the calculation method is simple and easy to implement. 2. Clearly reflects the speed of capital recovery.
- 3. It can be used to determine the feasibility of a single solution (combined with other methods), and it can also be used to compare solutions (determine the advantages and disadvantages).
- Disadvantages:
- 1. No consideration of the time value of funds. 2. It does not reflect the income and expenses after investment recovery.
- 3. When the investment amounts of the schemes are quite different, the conclusion of the comparison is difficult to determine!
- 2. Static investment effect coefficient method (Ignore time indicators)
- Related concepts : The investment effect coefficient, also known as the return on investment or return on investment, is the ratio of the annual net income of the project to the total investment of the project. Not considering the time value of funds is called the static investment effect coefficient. Economic meaning of investment effect coefficient: net income per yuan (unit investment) per year.
- Steps: (1) Calculate the static investment effect coefficient (2) Apply the static investment effect coefficient to calculate the investment profit rate, investment profit and tax rate, and capital profit margin (3) Compare the program differences by calculating the static additional investment effect coefficient
- Significance: The investment effect coefficient guarantees the feasibility of the scheme. The static additional investment effect coefficient reflects the relative economic benefits of the two schemes and does not reflect the absolute economic benefits of the two schemes themselves.
- Method evaluation:
- advantage:
- 1. The economic meaning is intuitive and clear, and the calculation method is simple and easy to implement. 2. Clearly reflects the profitability of funds.
- Disadvantages:
- 1. The time value of funds is not considered, and many economic data such as project construction period and life period are discarded, so generally only
- It is used in the preliminary research phase of technical and economic data incomplete projects. .
- 2. It does not reflect the risk of investment. The investment recovery period is too long, and the economics of the project will deteriorate with technological progress.
Economic evaluation dynamic evaluation
- Considering the time value of funds, the compound interest calculation method is used to convert the expenditure and income at different points in time to the same point in time. For detailed project feasibility studies.
- I. Dynamic investment payback period method
- Related concepts: Considering the time value of funds, the time required to recover the total investment of a project is calculated at a certain compound interest rate, usually expressed in years.
- Steps: (1) Calculate the dynamic investment payback period (2) Calculate the dynamic investment payback period from the financial cash flow statement (3) Calculate the average annual net income
- (4) Calculate dynamic additional investment payback period and dynamic differential investment payback period
- Note: After considering the time factor, the dynamic investment payback period should generally be greater than the static investment payback period. When the project cycle is not long, the static and dynamic calculation results are not much different
- Method evaluation:
- advantage:
- 1. The economic meaning is intuitive and clear. 2. The time value of funds is considered, and the profitability of funds is more scientifically and reasonably reflected.
- Disadvantages:
- 1. The calculation is more complicated.
- 2. It does not reflect the project's income, the project's useful life and the project's ending residual value after the investment is recovered, which cannot fully reflect the economic benefits of the project.
2. Dynamic Investment Effect Coefficient Method
- Similar to the static investment effect coefficient method.
- Related concepts: Compare the dynamic investment effect coefficient with the benchmark or industry investment effect coefficient. If it is greater, it indicates that the project is acceptable.
- This method is generally used to evaluate whether a single or independent scheme is acceptable.
Other methods of economic evaluation
- Annual value method, internal rate of return method, etc. [2]
Economic evaluation index
- In terms of national economic evaluation [3] : internal economic rate of return, economic net present value (ENPV), economic net present value rate (ENPVR), economic exchange cost, economic exchange cost
- Aspects of economic evaluation of engineering projects: output efficiency indicators, operating efficiency indicators, profitability indicators, debt serviceability indicators, development ability indicators, social contribution indicators
- General indicators: time indicators, value indicators, ratio indicators