![]() ERRs represent MCC’s best estimate of the expected economic returns of the project, while the sensitivity analysis captures the potential range of those outcomes. MCC conducts sensitivity analysis on its ERRs using a range of plausible values on the major variables that drive the results. Nonetheless, projections of future economic activity for both scenarios must account for uncertainty. MCC models incorporate the best information available at the time regarding core parameters. Projects that are likely to generate larger increases in household incomes per dollar invested will have higher ERRs. Investments meeting MCC’s hurdle ERR of 10 percent, a common discount factor for development projects, are those for which benefits are at least as high as costs after adjusting for the time value of money. ![]() The ERR is expressed in percentage terms and represents the rate at which benefits equal costs after discounting. Since the value of a benefit accruing to people sooner is greater than the value of the same benefit accruing later, benefits and costs are discounted over time. In other cases, investments could be expected to decline in the counterfactual, for example if electrical outages would be expected to increase without the project.Įconomic analysis compares the difference in incomes or value-added between the two scenarios, factoring in the timing of accrued costs and benefits. For example, a growing economy would be expected to continue on its recent (or projected) growth trajectory without the project, and private investments would likely be made. While this may be considered a “status quo” scenario, the estimation of future economic outcomes without the project also accounts for dynamic trends. The second scenario, called the counterfactual, reflects an estimate of what is likely to happen in the future if the project does not take place. This scenario reflects the increases in income or value-added generated by the proposed program, as well as the full costs related to the program. The expected outcome without the project.The expected outcome with the project and. ![]() However, it does not incorporate the non-income related value of environmental and social improvements, given MCC’s mission.Įvery ERR calculation considers two scenarios: This analysis includes income or value-added that is expected to be generated through environmental and social improvements, such as the effect of clean water on health outcomes for improved female educational attainment on incomes. MCC’s methodology for cost-benefit analysis, which produces an ERR metric, is best described as micro-economic growth analysis, which captures the expected increases in local incomes. Benefits include the increased income of a country’s population or the increased value-added generated by producers (firms and households) that can be attributed to the proposed project. In MCC’s cost-benefit analyses, the costs of a project include all necessary economic costs-financial expenses covered by MCC and other parties, as well as opportunity costs of non-financial resources expended. What is an Economic Rate of Return (ERR)?Īn ERR provides a convenient metric, produced from a cost-benefit analysis, that compares the economic costs and benefits of a program. Some familiarity with cost-benefit analysis is essential to using these spreadsheets.
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