Differences Between Economic Analysis And Financial Analysis

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Financial and Economic analyses are essentially used to determine the costs incurred and the resulting benefits from investing in a project. They both involve ascertaining the NPV or the net present value of a project based on its estimated present and future cash flows, appropriately discounted. (Helfert ,et.al,2001) Both techniques, however, differ in their implications and hence also in what are defined as a cost and a benefit. Financial and economic analyses have similar features. Both estimate the net-benefits of a project investment based on the difference between the with-project and the without-project situations. In this article we are going to differentiate between economic and financial analysis.

Below mentioned are some of the key points that helps us understand the difference between economic and financial analysis.

Financial Analysis– Financial analysis is largely confined to individual organizations or their units. It involves a fairly quantitative, fund-based approach that directly compares the expenses and revenues from a venture to determine profitability and hence sustainability. Such evaluation may often employ the financial statement of an enterprise – the balance sheet, the income statement and the cash flow statement. For example in an oil drilling company evaluating an independent project they are setting up a new well. If the present value of the annual cash flows were to exceed the initial investment and other costs such as taxes, possible interest payments and operational expenses, the project would be looked upon favorably. Additionally, the firm might also look at the project’s effect on its financial ratios to be certain about feasibility. To gather detailed knowledge on financial analysis students can avail instant help from OmanEssay essay deutsch.

Economic Analysis– Economic analysis takes a much wider view and entails the impact of a project on society as a whole. It considers the viewpoints of all stakeholders and how the results of a project align with the broader economic and social policies as well as the International scenario. The costs in an economic analysis are a measure of the resources that a society collectively invests for the fulfillment of the project. The benefits, however, need not be just monetary and often include intangible benefits.
In the above oil well case, for instance, the economic analysis deals with not just the profits from an industry perspective.  Instead, negative externalities such as pollution, displacement and deforestation are treated as costs awhile positive externalities such as employment generation which is considered benefits. Determining a quantitative measure of such factors remains a challenge. Students who need further knowledge on economic analysis can avail instant essay help from OmanEssay experts.

Below mentioned are some points that help us point down the differences between Economic vs. financial Analysis

Difference Between Economic And Financial Analysis

Financial Analysis

  • Financial analysis tends to rely on exact market prices for calculating costs. (Vanhegan,et.al,2012)
  • Taxes are treated as costs and subsidies as returns.
  • Interest payments are treated as a cost in financial analysis as they are the additional amount that the stakeholder has to pay to external bodies along with returning the borrowed capital.
  • A financially feasible project, therefore, might not be economically viable if the overall impact on society is negative.
  • The financial analysis compares benefits and costs to the enterprise.
  • financial analysis uses market prices to check the balance of investment and the sustainability of a project,

Economic Analysis

  • The market price is often modified to arrive at what is popularly known as the ‘shadow price’ or ‘economic price’
  • Taxes are levied on a project’s returns and are collected by the government itself.
  • Interest on capital invested by society is also returned to society as a gain on the capital, thus again removing the need for any separate computation. (Vogel,2020)
  • An economically viable project may not always be financially sustainable. The government may, however, choose to take up such a project by supplying additional funds, owing to its positive impact on society.
  • The economic analysis compares the benefits and costs to the whole economy.
  • Economic analysis uses economic prices that are converted from the market price by excluding tax, profit, subsidy, etc. to measure the legitimacy of using national resources to certain projects.

Conclusion

To conclude it can be said that financial analysis is largely confined to individual organizations or their units. It involves a fairly quantitative, fund-based approach that directly compares the expenses and revenues from a venture to determine profitability and hence sustainability. On the other hand Economic analysis takes a much wider view and entails the impact of a project on society as a whole. It considers the viewpoints of all stakeholders and how the results of a project align with the broader economic and social policies as well as the International scenario. The costs in an economic analysis are a measure of the resources that a society collectively invests for the fulfillment of the project. Both are essentially used to determine the costs incurred and the resulting benefits from investing in a project. They both involve ascertaining the NPV or the net present value of a project based on its estimated present and future cash flows, appropriately discounted. Financial analysis tends to rely on exact market prices for calculating costs. On the other hand the market price is often modified to arrive at what is popularly known as the ‘shadow price’ or ‘economic price’.  A financially feasible project, therefore, might not be economically viable if the overall impact on society is negative. Similarly an economically viable project may not always be financially sustainable. The government may, however, choose to take up such a project by supplying additional funds, owing to its positive impact on society. To understand the difference between economic and financial analysis in details students can now avail online assignment help from OmanEssay essay typers.

References

Helfert, E. A., & Helfert, E. A. (2001). Financial analysis: tools and techniques: a guide for managers (pp. 221-296). New York: McGraw-Hill.

Peterson, P. P., & Fabozzi, F. J. (1994). Financial management and analysis. New York,, USA: McGraw-Hill.

Vogel, H. L. (2020). Entertainment industry economics: A guide for financial analysis. Cambridge University Press.

Cooter, R. D., & Rubinfeld, D. L. (1989). Economic analysis of legal disputes and their resolution. Journal of economic literature, 27(3), 1067-1097.

Vanhegan, I. S., Malik, A. K., Jayakumar, P., Ul Islam, S., & Haddad, F. S. (2012). A financial analysis of revision hip arthroplasty: the economic burden in relation to the national tariff. The Journal of bone and joint surgery. British volume, 94(5), 619-623.

Orlewska, E., & Mierzejewski, P. (2004). Proposal of Polish guidelines for conducting financial analysis and their comparison to existing guidance on budget impact in other countries. Value in Health, 7(1), 1-10.

Halpern, P., Trebilcock, M., & Turnbull, S. (1980). An economic analysis of limited liability in corporation law. The University of Toronto Law Journal, 30(2), 117-150.

Fromlet, H. (2001). Behavioral finance-theory and practical application: Systematic analysis of departures from the homo oeconomicus paradigm are essential for realistic financial research and analysis. Business economics, 63-69.

Bacchetta, M. D., Girardi, L. N., Southard, E. J., Mack, C. A., Ko, W., Tortolani, A. J., … & Lee, L. Y. (2005). Comparison of open versus bedside percutaneous dilatational tracheostomy in the cardiothoracic surgical patient: outcomes and financial analysis. The Annals of thoracic surgery, 79(6), 1879-1885.

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