Page 1 of 17

Journal for Studies in Management and Planning

Available at

http://edupediapublications.org/journals/index.php/JSMaP/

ISSN: 2395-0463

Volume 04 Issue 04

April 2018

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 66

Conventional And Discounted Cash Flow Appraisal Techniques In Infrastructure

Investment Decision

By

Balogun Olayemi Oluwayemisi

Department of Estate Management

Bells University of Technology, Ota, Ogun State, Nigeria

And

Araloyin Funmilayo Moyinola

Department of Estate Management

Obafemi Awolowo University, Ile-Ife, Osun State, Nigeria

Abstract

The decision to invest in infrastructure is one that demands a well thought out plan on how to

ensure the success of such an investment decision, owing to the capital intensive nature of such

investment. A number of appraisal techniques (for instance the conventional and the discounted

cash flow appraisal techniques) have been identified to aid investment decision. This paper seeks

to identify to which extent the conventional and the discounted cash flow appraisal techniques

gives accurate appraisal of infrastructure investment decision by discussing the characteristics

and risks associated with infrastructure assets in relation to the strength and weakness of each

investment appraisal techniques. The study found out that no one of the appraisal techniques (i.e.

the conventional and the discounted cash flow) is efficient enough to fully appraise infrastructure

investment. As such, a combination of both the conventional and the discounted cash flow

methods of investment appraisal are adjudged to be suitable in the appraisal of infrastructure

investments. More specifically, a discounted pay back appraisal method will satisfy the objective

of using the conventional and the DCF techniques.

INTRODUCTION

Effective organizational decision making is

very germane to any business administration

(Dearlove, 1998). Apart from the many

things that business executive do, effective

decisions making is the first managerial skill

they must achieve (Drucker, 1979).

Choosing from a wide range of business

opportunities is also challenging for the

business investors (Hertz, 1964). Similarly,

Page 2 of 17

Journal for Studies in Management and Planning

Available at

http://edupediapublications.org/journals/index.php/JSMaP/

ISSN: 2395-0463

Volume 04 Issue 04

April 2018

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 67

a prospective investor in infrastructure

investment is also faced with the challenge

of choosing from alternative capital

investment.

Investing in infrastructure is a capital

investment owing to the fact that it is capital

intensive and thus one that demands a well

thought out plan on how to ensure the

success of such an investment decision. In

order to help the investor make the right

decisions, scholars have devised on a

number of appraisal techniques to aid in

assessing competing investments as well as

lone investment to justify their worth. There

are the conventional (traditional) methods of

appraisal techniques and the discounted cash

flow methods of investment appraisal

(Ogunba and Ajayi, 2017). There has almost

always been a tussle on which gives the

most accurate result. However, the believe

exists that the discounted cash flow

appraisal techniques give more accurate

picture of an investment than the

conventional appraisal techniques.

To this end, this paper seeks to identify to

which extent the conventional and the

discounted cash flow appraisal techniques

gives accurate appraisal of infrastructure

investment decision by discussing the

characteristics and risks associated with

infrastructure assets in relation to the

strength and weakness of each investment

appraisal techniques.

INFRASTRUCTURE

Oxford English dictionary, 2009 edition

defines infrastructure as the basic physical

and organizational structures needed for the

operation of a society or enterprise.

Infrastructure is typically defined by a

couple of authors though in different

perspectives yet in the same direction;

Fulmer (2009) sees the term to typically

refer to the technical structures that support

a society, such as roads, water supply,

sewers, electrical grids, telecommunications

and so forth, and can be defined as "the

physical components of interrelated systems

providing commodities and services

essential to enable, sustain, or enhance

societal living conditions”. Arthur &

Sheffrin (2003) define infrastructure to be

“the services and facilities necessary for an

economy to function”. Typically,

infrastructure means extensive public

systems, services, and facilities of a country

or region that are essential for productivity.

Viewed functionally, infrastructure

facilitates the production of goods and

services, and also the distribution of finished

Page 3 of 17

Journal for Studies in Management and Planning

Available at

http://edupediapublications.org/journals/index.php/JSMaP/

ISSN: 2395-0463

Volume 04 Issue 04

April 2018

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 68

products to markets, as well as basic social

services such as schools and hospitals; for

example, roads enable the transport of raw

materials to a factory. It can also be viewed

as the set of interconnected structural

elements that provide framework supporting

an entire structure of development. It is an

important term for judging a country or

region's development. In military parlance,

the term refers to the buildings and

permanent installations necessary for the

support, redeployment, and operation of

military forces. In real estate terms,

infrastructure is regarded as a landed

property, that is, any improvement on land

that is attached to land.

According to Mackay-Fisher (2003), the

sector tends to be separated into two broad

subsets - economic and social. Economic

infrastructure includes highways, water and

sewerage facilities, and energy distribution

and telecommunication networks whereas

social infrastructure encompasses schools,

universities, hospitals, public housing and

prisons. In an article quoted from an online

paper and journal, infrastructure is classified

as hard and soft infrastructure. Hard

infrastructure refers to the large physical

networks necessary for the functioning of a

modern industrial nation and they include:

transportation infrastructure, energy

infrastructure, water management

infrastructure, communication infrastructure,

and solid waste management. Whereas, Soft

infrastructure refers to all the institutions

which are required to maintain the

economic, health, and cultural and social

standards of a country, such as the financial

system, the education system, the health care

system, the system of government, and law

enforcement, as well as emergency services

and they include governance infrastructure,

economic infrastructure, social

infrastructure, cultural, sports and

recreational infrastructure. From the above,

infrastructure can be seen to be broadly

categorized on the basis of its nature or

function. That is, from the functional aspect,

infrastructure is sectored as being economic

or social. And from the nature aspect,

infrastructure is said to be hard or soft.

INFRASTRUCTURE INVESTMENT

Maketa Investment Group (2008) defines

infrastructure as the fundamental

groundwork of basic services, facilities, and

institutions upon which a society depends.

Also, infrastructure could otherwise

represent economic, municipal, or social

infrastructure, or simply public works.

These public assets include roads, bridges,