Basic Concepts and Methodology The methodology of project appraisal
rests on the theory and practice of social cost-benefit analysis, which is also
used in the United States and other developed countries. The basic idea of
cost-benefit analysis is simple: To decide on the worth of projects involving
public expenditure (or, indeed, in which public policy can play a crucial role),
it is necessary to weigh the advantages (benefits) and the disadvantages
(costs) to society as a whole. The need for social cost-benefit analysis arises
because the normal yardstick of commercial profitability that guides the investment
decisions of private investors may not be an appropriate guide for
public-investment decisions. Private investors are interested in maximizing
private profits and therefore normally take into account only the variables that
affect net profit: receipts and expenditures. Both receipts and expenditures are
valued at prevailing market prices for inputs and outputs.