Investment Appraisal: Cost-Benefit Analysis

Abstract

The aim of this chapter is to review the theory of and practical approaches to the appraisal of investment in the public sector. We define investment as any expenditure which results in benefits and costs over many time periods. Investment appraisal refers to several techniques, the appropriateness of which depend on the objective of the appraisal, which in turn depends on the objective of the organisation for which the appraisal is being conducted. In this chapter we consider only one technique: cost-benefit analysis (CBA), where it is assumed that the objective of investment appraisal is to evaluate an investment to decide whether or not society would prefer the change. We restrict our consideration to CBA because the general spirit of the original nationalising statutes, the 1978 White Paper (Cmnd 7131) detailing the objectives of nationalised industries and advice given to public sector analysts by Treasury documents (Treasury, 1982, 1983) is consistent with the argument that the objective of public sector investment appraisal is to evaluate each change in activities to decide whether or not society would prefer the change.1 Several excellent reviews of CBA exist, of which Prest and Turvey (1965) and Pearce (1983) are examples. But these are now rather dated and/or rather lengthy and/or lack rigour.KeywordsWage RateShadow PriceIndifference CurveHedonic PriceFunctional PerspectiveThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.