Maria C. A. Balatbat

Probabilistic DCF Analysis and Capital Budgeting and Investment—a Survey

The article surveys contributions to the literature covering the field of probabilistic discounted cash flow (DCF) analysis of individual capital investments from the earliest contributions of the 1960s to today. Such analysis includes the methods of present worth (net present value), annual worth, future worth, internal rate of return, payback period, and benefit:cost ratio. The history and development of the probabilistic case is traced, listing the main assumptions made and any restrictions to applications. The survey will be found useful by those engaged in risk management and decisions associated with investments and budgeting having uncertain outcomes.

A review of building/infrastructure sustainability reporting tools (SRTs)

Purpose – Buildings/infrastructure are recognised to have a significant impact on the environment and the community, and hence there is pressure on industry practitioners to incorporate environmental and social considerations in addition to the traditional cost, time and quality. The development of sustainability reporting tools (SRTs) to assist in the management of “green” building/infrastructure projects is pivotal in informing on progress in sustainability practices. However, the rapid growth of SRTs in the last decade, with different criteria and methodology, has created complications for stakeholders. Design/methodology/approach – The paper provides a comprehensive review of tools to guide practitioners, property investors, policy makers and developers towards making informed choices in “green” building/infrastructure projects. Comparative analyses, benefits and limitations of these tools are discussed in the paper. Findings – Some of the findings from the analysis of SRTs include: an emphasis on env...

The relationship between sustainability practices and financial performance of construction companies

Purpose – Over recent years, a number of companies have committed to sharing information relating to their environmental, social and governance (ESG) activities, in response to a higher demand for transparency from stakeholders. This paper aims to explore the impact of such reporting on the financial performance of construction companies.Design/methodology/approach – This paper first examines the state of non‐financial reporting of publicly‐listed construction companies on climate change, environmental management, environmental efficiency, health and safety, human capital, conduct, stakeholder engagement, governance and other matters deemed to be of concern to institutional investors. It then presents the results of an empirical study on the impact of issuing non‐financial reports and the extent of companies’ sustainability practices (represented by ESG scores) on the financial performance of the companies. Financial performance is measured via a range of financial ratios.Findings – The paper finds that a...

Comparative performance of publicly listed construction companies: Australian evidence

Understanding the performance of publicly listed Australian construction companies, in comparison with other Australian listed companies, is vital to the construction sector’s continuous access to capital from the public equity market. Evidence on the performance of construction companies that do business in building and/or civil infrastructure is presented and compared with the Australian All Ordinaries Index and a portfolio of publicly listed (blue chip) companies. Using fundamental analysis, a comprehensive assessment on a range of financial and performance indicators is provided (including share prices, equity valuation multiples and profitability ratios) over the 10‐year period, 1998 to 2007. The results show that, apart from the period when the Goods and Services Tax was introduced in 2000, the performance of publicly listed Australian construction companies in most of the indicators assessed is comparable to the largest traded shares on the Australian Securities Exchange. The empirical evidence is encouraging and could potentially elicit interest and confidence for investors to invest in construction companies.

A contractor's analysis of the likelihood of payment of claims

Purpose – The purpose of this paper is to present an original model, and one of practical use, for a contractors internal analysis of the likelihood of late and incomplete payments, in an uncertain payment environment. Payments typically dominate the thinking of a contractor and the way a contractor operates. The model applies equally to subcontractors, suppliers and consultants.Design/methodology/approach – The model is based on Markov chains, specially adapted to the problem, where the states are defined as the period of time by which the payment is overdue. In addition, there are special states corresponding to claims that have been paid, and those that need resolution. Transitions between states reflect the payment characteristics on the project (which itself depends on the type of project and the owner‐contractor relationship).Findings – Real project data confirm the validity of the model. Output from the model can be shown to agree with actual contractor payment data. The output is in terms of prob...

A Study of Correlation Aspects in Probabilistic NPV Analysis

In probabilistic net present value (NPV) analysis, expressed in terms of benefits and costs, the expected value and variance of the net present value are determined from the expected values and variances of the benefits and costs and correlations between benefits and costs. This article outlines an empirical study and an examination of the correlation between benefits and costs. Intercomponent and intertemporal correlations are estimated. In addition, the article determines the upper and lower bounds of the variance of the net present value, when the exact intertemporal and intercomponent correlations are not known.

The influence of extra projects on overall investment feasibility

Purpose – The paper looks at the influence of adding more projects on overall investment feasibility under conditions of uncertainty, and how far into the future the project cash flows should be relied upon, given that the project owner expects a reasonable level of feasibility attached to the investment.Design/methodology/approach – The paper presents a formulation for the feasibility of the multi‐project case under uncertainty. A second order moment analysis method is adopted. Existing theory is extended to take into account the presence of multiple projects with a requirement imposed on feasibility by the project owner. In tandem with the theoretical development, example case study numerical results are presented.Findings – With a conventional deterministic discounted cash flow analysis, the feasibility calculations change little in going from one to many projects. However with uncertainty attached, the feasibility calculations need to be reworked and become more complex, the issue of feasibility becom...

Management efficiency performance of construction businesses: Australian data

Purpose – Construction businesses are perceived uncertainly by investors, and are generally assumed to represent more risk than other businesses. Added to this is the perception of poor business management practices being adopted by construction companies, sometimes resulting in business‐failure. Fluctuations in construction workload contribute to investor anxiety. In this light, the paper aims to present a study of the comparative management efficiency performance of construction companies.Design/methodology/approach – Publicly listed Australian construction companies over the ten‐year period 1998‐2007 are examined. Performance is compared with a select number of “blue chip” companies as a benchmark. In total, 19 management efficiency measures are used including asset management ratios, debt and safety ratios, and cash flow ratios. The construction companies used in the study engage in work covering the full range of construction activities.Findings – The results indicate that construction companies perf...

Performance Risk Associated with Renewable Energy CDM Projects

The clean development mechanism (CDM), part of the Kyoto Protocol to combat rising carbon emissions, allows projects to proceed in developing countries in return for providing carbon credits to developed countries. The feasibility of CDM projects is commonly justified through a combination of sale of the end product and carbon credits, which have a financial value, generated through carbon emissions avoided. However, the carbon credits assumed or estimated at the feasibility stage may not be realized or achieved on project completion; the issuance of carbon credits may be less than that originally estimated, thereby affecting project feasibility. This paper examines the performance risk associated with the discrepancy between estimated and issued carbon credits. Data for 227 renewable energy projects, comprising hydroelectric and wind power of varying scale and in multiple countries, are examined in establishing the performance risk. The study found that overall, the hydroelectric power projects performed...

A proposed framework for assessing the sustainability of infrastructure

The development of sustainability assessment and sustainability reporting tools (SRTs) for infrastructure is pivotal because they serve to inform on progress towards achieving sustainability goals. However, the assessment of sustainability can be improved. The purpose of this paper is to draw attention to the deficiencies and limitations of existing SRTs and offer an alternative framework that is intended as a guide to enhancing assessment and reporting, and addressing current deficiencies. The alternative framework proposed encompasses six elements: (1) systems-based criteria selection; (2) quantitative measurement scales for criteria; (3) characterizing each criterion by a measure of central tendency and dispersion; (4) the distinction of additionality; (5) criteria weighting; and (6) combining criteria to give an overall score characterized by a measure of central tendency and a measure of dispersion. This is based on infrastructure project comparison. It is contended that, within the alternative framework offered, overall sustainability scores obtained provide an improved characterization of sustainability, because of the acknowledgement of the different elements and their combination. The paper offers a rational way by which the sustainability of infrastructure projects can be gauged and compared.