Centre for Financial & Management Studies (CeFiMS) - University of London

Individual Professional Courses – IPC  

Investment & Project Appraisal [FME205]

Introduction

This course is concerned with the methodologies used in the selection and appraisal of investment decisions in private and public sectors. Two main themes are addressed:

• what is needed from the micro, corporate sector, point of view in order to analyse, assess and gauge investment activities?
• how can we apply cost-benefit analysis to public sector investment projects?

Aims & Objectives

The course aims to introduce the main theoretical and practical issues involved in the appraisal and assessment of investment projects. The first part of the course covers private and public sector investment evaluation in developed countries (projects such as waterworks, irrigation, transport, communication, health, education, etc.). In the latter half, the focus is on the growth of development projects in LDCs and addresses issues relating to shadow pricing, environmental projects and a more theoretical analysis of cost-benefit and appraisal methodologies, in the context of several specific case studies.

Resources

Students receive a looseleaf binder containing eight ‘course units’; these texts are carefully structured to provide the main teaching and are equivalent to traditional course lectures, defining and exploring the main concepts and issues, locating these within current economics debate and introducing and linking the further assigned readings. Two obligatory assignments, which are marked by your CeFiMS tutors, and a specimen examination paper are also included within the student pack, along with the following:

Textbooks:

Steve Curry and John Weiss, Project Analysis in Developing Countries, Second Edition, 1999, Macmillan, ISBN0333792920.

Steve Lumby and Chris Jones, Investment Appraisal and Financial Decisions, Sixth Edition, 1999, Thompson Business Press, ISBN1861522576.

Richard Layard and Stephen Glaister [eds] Cost-Benefit Analysis, Second Edition, 1994, Cambridge University Press, ISBN0521466741.

Readings:

Several recently published and important articles have been assembled into a Reader, to illustrate and augment the course text.

Course Timetable:

This shows the linkage between the various components of the course and indicates the schedule for reading the texts, submitting assignments, etc.

Course Content

Unit 1 Introduction and Overview

The first unit introduces the issues around investment and project appraisal; it provides an overview of activities in this area, differentiates private and public sector investments and outlines the evolution of the subject, focusing finally on project stages and issues in developing countries.

Unit 2 Investment Appraisal

Basic Evaluation Techniques

Unit 2 is about the basic principles of investment appraisal. It introduces the main evaluation methods and techniques, demonstrating the application of each method through appropriate examples and exercises, and discussing their relative strengths and weaknesses.

Unit 3 Cash Flows, Capital Budgeting and Investment Decisions

This unit continues and expands the discussion of the NPV [Net Present Value] method of investment, demonstrating how to identify and use cash flows for investment appraisal, how to deal with problems posed by capital market imperfections, and how to take account of risk and uncertainty in the context of investment appraisal.

Unit 4 Social and Economic Cost-Benefit Analysis

Unit 4 examines the basic principles of cost-benefit analysis, using a simple example to illustrate the rationale for, and common techniques used in, social cost-benefit analysis. The unit focuses mainly on two general areas of concern: identifying relevant costs and benefits and analysing the problems associated with their valuation. An illustrative case study ends the unit.

Unit 5 Shadow Prices

This unit considers the use of shadow or efficiency prices in the appraisal of public sector projects. It examines the rationale for the use of world prices to value inputs as well as outputs, discusses how to evaluate projects by using the world price numeraire and how governments make decisions when market and shadow prices give different signals.

Unit 6 The Choice of Discount Rate and Methods of Discounting in Project Appraisal

Unit 6 is about the choice of an appropriate social rate of discount and about different methods of discounting in public sector investment appraisal. It looks at the social opportunity cost rate and social time preference rate, both in theory and in practice, and it examines how public sector projects affect future generations through the choice of discount rate.

Unit 7 The Environment and Project Appraisal

This unit considers the environmental dimensions of project appraisal. Since governments as well as investment analysts now acknowledge that the quality of the environment is essential to human welfare, the environmental aspects of all investment projects must be taken into account. The unit looks both at relevant economic theory and a number of real-life examples in both developed and developing countries.

Unit 8 Welfare Weights, Risk and Uncertainty

The final unit comes in two parts: the first examines the question of giving welfare weights to the income accruing to various groups (the theory of diminishing marginal utility of consumption), and the second discusses risk and uncertainty within the framework of public sector project appraisal.

Tuition & Assessment

The course is assessed by two assignments, written at set intervals during the course, and a three-hour examination taken at the end of the study year after all coursework has been completed. Assignments count for 30% of the final course result, whilst the examination contributes the remaining 70%.