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The terms ‘economic viability’ and ‘financial viability’ are not different for companies. However, from thee national angle and from the view-point of the economy as a whole, economic feasibility and financial feasibility are not considered to be the same. Cost and benefits to the nation due to the proposed project are considered in the economic feasibility test. Tax revenue, generation of employment, saving of foreign exchange and such other factors, differentiate economic viability from financial viability. The government and government agencies calculate the economic indicator of a project permitting the project or financing it.

Techniques in Economic Analysis

Techniques for checking economic viability are:

1) Economic Rate of Return (ERR): A new project of a firm may have an impact on the economy in many ways. Revenue generation for government, conservation or earnings of valuable foreign exchange and creation of employment are most important among them, especially in under-developed and developing economies. The cost and benefits of a project to the national economy can be better seen through the calculation of the economic rate of return.

A firm’s financial cash flow is modified in the ERR, with basically two elements:
i) Those inflows and outflows which only change hands within a single economy, and
ii) Those elements which address the grave concerns of the nation.

2) Social Rate of Return (SRR): The process of calculating the social rate of return is also known as social Cost Benefit Analysis (SCBA). In the economic analysis of a project, financial costs and benefits are adjusted with:
i) Those costs and benefits that only change hands, and
ii) Some factor for economic concern like the foreign exchange involved in the project.

The social rate of return is that rate which equates the present value of social benefits to the present value of social cost. The project is accepted if SRR is higher than an alternative project, which is forgone due to shortage of funds or if SRR is greater than the consumption rate of interest in the economy.

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