How to make the decision?

The purpose of an appraisal is to indicate that no policy, programme or project is adopted without first having the answers to these questions:
(a) Are there better ways of achieving a given objective (e.g. reduced flood risk)?
(b) Could the resources be put to better use (e.g. building a hospital)?

The appraisal also should explore how confident we can be that one option is better than a range of other options. Two criteria frequently used in comparing the different options are:

  • The benefit-cost ratio: the ratio of the present value of all of the streams of benefits over the present value of all of thestreams of costs;
  • The net present value: the difference between the present value of all of the streams of benefits and the present value of all of the streams of costs.

Projects are only economically viable if the benefits exceed the costs (i.e. the ratio of benefits to costs is greater than 1.0). Where benefits marginally exceed costs, there is often high uncertainty as to whether an option is justified, because only a small change or error in either the benefits or costs would tilt the balance the other way. So when comparing a ‘do something’ option to the baseline option, confidence is needed that a ‘do something’ option is clearly preferable.

                                                     Penning-Rowsell, E.C., Priest, S., Parker, D., Morris, J., Tunstall, S. Viavattene, C., Chatterton, J.B., and Owen, D.  (2013) Flood and Coastal Erosion Risk Management: A Manual for Economic Appraisal. London: Routledge. 

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