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   Course Title    Investment Projects Evaluation for Economic Development
Lecturer    Edward V. Karslian
Institution    State Engineering University of Armenia
Country    Armenia


The intention of this course is to make it possible for those wishing to learn about cost-benefit analysis to acquire the skills needed for the preparation and evaluation of investment projects in developing and transition economies. It is meant for advanced undergraduates where economics is a major component of the program.

One of the major objectives of this course is to emphasize on investment decisions that enhance the equity of development, i.e. it is not concerned only with the efficiency of the use of resources, or with maximizing the growth of the GNP; it is equally concerned with the inequities of income distribution that prevail in the developing and transition countries.


Investment projects evaluation is one of the key components in the analysis of economic development strategies. It is mainly concerned with a projectís profitability from the point of view of the enterprise on the one hand and of the country as a whole on the other. From this point of view the proposed course, which provides a step-by-step approach to an assessment of the financial, economic and social impact of an investment proposal, is ideally appropriate to our institution curriculum, academic plan and objectives.


The methodology proposed is to develop concepts through the use of realistic examples and to introduce the computer as a productivity-enhancing tool for modeling and analyzing investment decision problems. COMFAR III Expert software developed by United Nations Industrial Development Organization (UNIDO) to facilitate the financial, economic and social Evaluation of investment projects will be used extensively in the classroom.


This new one-semester course (68 hours) Investment Project Evaluation for Economic Growth is divided into 8 chapters.

Chapter 1 discusses phases of the investment projects: project preparation, its evaluation and implementation, which are closely interrelated and that the ultimate success of an investment decision depends on each of them.

Chapter 2 contains a detailed discussion of commercial profitability analysis, which is the first step in the economic appraisal of a project. It is concerned with assessing the feasibility of a new project from the point of view of its financial results. The project's direct benefits and costs are therefore calculated in pecuniary terms at the prevailing (expected) market prices. This analysis is applied to appraise the soundness and acceptability of a single project as well as to rank projects on the basis of their profitability.

Chapter 3 is concerned with international competitiveness of the products of a project. It is of vital importance for an evaluator to find out whether the products of an export-oriented project under consideration will be internationally competitive and therefore may be exported. This assessment is of particular importance also for projects of which the economic scale of production is large than what can be absorbed in the domestic market.

An investment project should also be justified within the wider context of the national economic and social environment. This is important because commercial profitability may not give a good idea of the contribution of a project to the economy of a country. Emphasis (up to now) has been only on finding the profits of a project in monetary terms and not on its real contribution to the welfare of the society. For measuring a project's contribution to the national economy, national profitability analysis should be applied (chapter 4).

It is characterized as follows:

  • The national development impact of a project is assessed and evaluated;
  • Project inputs and outputs are valued at shadow prices that reflect their true value to the national economy;
  • Direct effects on the economy (involving imports, exports, employment, foreign exchange, supply and demand, ecological conditions etc.), as well as indirect effects (affecting performances in other sectors, through reduced under-utilization of installed capacities, new investment initiatives etc.), are included in the analysis where significant (these effects may be economic benefits or costs, both tangible and intangible);
  • Social time preferences are accounted for.

Chapter 5 contains a discussion of the technique of commercial and national project evaluation under uncertainty and their application under various conditions. We discuss sources and causes of uncertainty, sensitivity analysis, break-even analysis, scenario analysis, probability analysis and evaluation of inflation risks.

In chapter 6, we present alternate financing mechanisms for entrepreneurs. The major focus of this chapter is on the question of the alternative means by which entrepreneurs can finance the investment projects, which they wish to pursue.

The problem of financing investment projects is equally important to entrepreneurs in all countries. Thus many of the techniques and factors commonly used in the financial management of corporation in developed economies can be applied to entrepreneurs in the developing world and transition economies. All entrepreneurs must meet the standard of a need to generate revenues in excess of costs and provide their owners with a return commensurate with the risks being taken. Moreover, all private voluntary capital is essentially funneled through the capital markets of the world where returns and risks are calibrated and measured in a profit-maximizing framework. Hence, firms from developing countries and economies in transition must compete with firms from developed countries for the available private voluntary funds. Here we consider the determination of the effective cost of borrowed funds and types of innovative fund arrangement and fund packages available to entrepreneurs.

In chapter 7 we present an analysis of the role of foreign direct investment (FDI) in promoting economic growth. Then we move into a detailed discussion of factors inhibiting FDI in Armenia.

Finally in chapter 8 we consider three case studies. All have been taken from actual feasibility reports and include a procedure for using COMFAR III Expert (Computer Model for Feasibility analysis and Reporting) System, developed by United Nations Industrial Development Organization.


  1. Mandatory

    1. Robert J. Brent, Project Appraisal for Developing Countries, New York University Press, New York.
    2. Anthony E. Boardman, David H. Greenberg, Aidan R. Vining and David L.Weimer. Cost-Benefit Analysis: Concepts and Practice Prentice-Hall, Inc.
    3. W. Behrens and P.M. Hawranck, Manual for Preparation of Industrial Feasibility Studies, UNIDO Publication No. ID/372
    4. Guidelines for Project Evaluation, UNIDO Publication No. ID/SER.H/2

  2. Recommended

    1. Harold Bierman, Jr. and Seymour Smidt, The Capital Budgeting Decision: Economic Analysis of Investment Projects, Eighth Edition. Macmillan Publishing Company
    2. Uwe Gotze und Jurgen Bloech, Investitionsrechnung: Modelle und Analysen zur Beurteilung von Investitionsvorhaben. 2. Auflage. Springler-Verlag
    3. Deryl Northcott, Capital Investment Decision-Making. The Dryden Press
    4. Chan S. Park, Contemporary Engineering Economics. Second Edition. Addison-Wesley
    5. Richard A. Brealey and Stewart C. Myers, Principles of Corporate Finance, Sixth Edition, Mc Graw Hill

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