INVESTMENT DECISION Types of Investment Business Environment Economic

INVESTMENT DECISION • Types of Investment • Business Environment - Economic - Political - Social - Technological • Resources Available - Human - Managerial - Financial - Technological

INVESTMENT DECISION (con) • Setting Precise Objectives • Estimating Total Investment • Analysing Timing of Expenditure • Estimating Life of Project • Forecasting Cash Inflows • Forecasting Long Run costs - Sunk costs - Closure Costs - Capital Financing Costs

INVESTMENT DECISION (con) • Evaluating Investment Proposal • Effect of Inflation • Effect of Uncertainty - sensitivity analysis - probability distributions

INVESTMENT APPRAISAL • Payback Method - average payback - actual payback • Simple (Accounting) Rate of Return • Net Present Value (NPV) • Internal Rate of Return (IRR) (Marginal Efficiency of Capital)

PRIVATE AND PUBLIC SECTORS • In private sector investment generally based on commercial criteria e. g. profitability • In public sector - due to the importance of externalities in relation to many types of investment such as transport – a distinctive approach is used • Cost Benefit analysis is based on a more broadly based appraisal which attempts to include the measured value of externalities • Public sector investment is based on cost Cost Benefit analysis

COST BENEFIT ANALYSIS • Cost Benefit Analysis is based on a wider estimate of costs and benefits than used in conventional analysis. The equivalent of profits (in commercial terms) would now be net social benefits = Social Benefits – Social Costs - Direct Economic Costs and Benefits - Indirect Economic Costs and Benefits (Externalities) - Socioeconomic Costs and Benefits e. g. congestion, pollution and noise - Other Costs and Benefits e. g. aesthetic considerations, impact on wildlife The final category though usually not subject to monetary measurement can be important in terms of ultimate decision

COST BENEFIT ANALYSIS (con) • Other Considerations - lifetime of project and rate of interest to be used in appraisal can be problematic in reaching decisions - market prices may not be directly relevant with opportunity cost elements in some cases very important - may be difficulties in comparing gains of those who benefit with losses of those adversely affected by developments - consumer surplus elements should be taken into account - uncertainty may exist as to alternative type situations

• Examples COST BENEFIT ANALYSIS (con) - earliest case of Victoria Line (in London) - siting of 3 rd London Airport - use in Ireland with reference to state companies (e. g. Bord na Mona and Aer Lingus) - used by State Agencies (such as IDA to evaluate foreign investment) - employed on large projects such as Luas and proposed National Sports Centre.