Department of International Business

University of Dhaka
Case study solution of United Utilities: “Using cost-benefit analysis to appraise
investments”
Cases in Business Decision Making| IB – 518

No. Name ID

1 Nurul Musallim Chowdhury BE-030-008

2 Afrin Jahan FM-030-016

3 Jannatul Ferdous SN-030-066

4 Nusrat Ahmed FM-030-070

5 Nusrat Jahan Tamanna KM-030-084

6 Md Abdur Rahman Niloy BE-030-092

Group Members

Submitted to
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Question 1: Describe how stakeholders affect a business and its investment?

Answer: A stakeholder is any individual, group, or aspect of society that has an interest in the
company. Stakeholders might therefore be internal or external to the company. All of these
stakeholder groups have an effect on a business, but some have a bigger effect than others, which
gives them more power and influence over how the business works. The impact and activities of
some groups of stakeholders on business and investment are as follows:

Shareholders and owners: Owners have the largest impact since they make decisions regarding
the company's activities and supply the funds necessary for it to start and expand. Shareholders
influence the objectives of the business. Shareholders are the investors in the business. If owners
and shareholders invest more in the business, then the business gets a boost to expand its
operations. 

Managers: Managers are responsible for making recommendations and decisions that have an
impact on the operation of the business. If the firm has skilled managers, then the firm gets the
opportunity to achieve its expected revenue, which can attract other investors to invest.

Employees: Employees may have minimal influence on business decisions. They can, however,
have a direct impact on the firm by refusing to work or not functioning as well as they should.
Poor performance from the employees can hamper the business operations of the firm which can
discourage the investors to invest in the business.

Customers: Customers purchase goods and services and provide information to companies on
how to improve them. Customers can also influence others by endorsing the business to friends
or warning them not to use it. Good feedback from the customers can increase the goodwill of
the firm and contribute to increase the value of the firm which may attract other investors to
invest.

Suppliers: If a supplier changes the quality of the goods they sell or how reliable their deliveries
are, it can have a big effect on a business. The quality of products of the firm are depend on the
quality of raw materials supplier supplies. It is directly related to the reputation of the company.

Government: Governments can make new laws, change tax rates, or change how much they
spend in ways that affect businesses, such as by giving more grants or money. The government
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can limit the range of investment amounts of the firm, which may have a major impact on the
business.

Question 2: Explain the benefits of effective investment appraisal for the

company and its stakeholders.

Answer: Investment appraisal is the analysis done to consider the profitability of an investment
over the life of an asset alongside considerations of affordability and strategic fit. More simply,
Investment Appraisal refers to the number of methods used to classify the attractiveness of an
investment.

Because of the involvement of large amounts of company resources and efforts which will
necessitate careful evaluation to be undertaken before a decision is reached. So, whether
considering starting or acquiring a business, or contemplating an investment in a new or ongoing
enterprise, it is equally important to evaluate the investment options and choose the most
effective one among them. There are numerous ways through which a business can carry out
investment appraisals, but three of the most common uses techniques are:

1. Payback Period: Payback period is the length of time between making an

investment and the time at which that investment has broken even.

2. Net present value (NPV): NPV is the difference between the current value of cash
inflows and the current value of cash outflows over a determined length of time.

3. The accounting rate of return (ARR): ARR is a ratio used in capital budgeting to
calculate an investment’s expected return compared to the initial cost. Unlike
NPV, ARR does not account for the time value of money, and if the ARR is
equal to or greater than the required rate of return, then the project is deemed to
have acceptable levels of profitability.

Through these three investment appraisal techniques, it can be identified if this particular
investment has long-term potentiality or not. An effective investment appraisal boosted the
possibility of the positive outcome of any investment benefiting both the company and its
stakeholders. Such as:
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 Benefits of effective investment appraisal for the company: An investment appraisal helps
to identify long-term trends as well as a company’s perceived profitability. It helps both the
company and stakeholders in showing whether a stock or a company has long-term potential
based on the profitability of its future projects and endeavors. For example, if a company is
involved in a number of long-term investment projects, there is also a greater risk that
revenues, costs and cash flows might be damaged. An effective investment appraisal aids to
mitigate these risks and reveal the project's general feasibility, giving the company a good
idea of the probable profitability of the project in both the near and long terms.

Another critical aspect of the investment appraisal describes the process required to move the
project from the initial investment appraisal to its inauguration. Projecting discounted cash flows
over a period of time, assigning specific values to inflation rates, estimating future regulatory
costs and other factors, helps to guide the company to make decisions. The investment appraisal
includes these variables by assigning probabilities to ranges of outcomes. This analytical
technique provides a realistic model that includes risk assessments for a company.

Lastly, an investment appraisal not only will demonstrate a project's relative financial feasibility,
it also will assess how well the particular project fits into a company's strategic plans. Ultimately,
how well a proposed project moves forward strategic objectives or how well it fits into the
company's social fabric will have wider financial implications.

 Benefits of effective investment appraisal for the stakeholders: Stakeholders are parties
invested in the success of a business or organization. A stakeholder has a vested interest in a
company and can either affect or be affected by a business' operations and performance. So,
whatever decisions the company takes regarding their investment has direct or indirect
impacts on the stakeholders. So, they are naturally concerned about the investment decisions.

It can be very expensive and perplexing to reserve an investment decision so caution needs to be
exercised in reaching the initial investment decision. Investment appraisal enhances the decision-
making process and gives the stakeholders a scope whether to invest in that project or not. Thus,
it can be said that an effective investment appraisal aids to simultaneously maximize stakeholder
value and while minimizing risk, since most decisions are made by companies where the
directors have a duty to act in the interests of their shareholders as well as other parties involved.
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Question 3. Compare the advantages and disadvantages of using a cost benefit

analysis of an investment rather than using ARR or Payback alone.

Answer: A cost-benefit analysis is a way to weigh the pros and cons of a decision in the most
objective way possible. It involves adding up the benefits of a project, investment, or course of
action and comparing them to the costs. Many businesses have lost a lot of money because they
put their money into a project that sounded good in the boardroom but didn't pay off. A cost-
benefit analysis can help you figure out if your ideas are worth it in the real world.

A cost-benefit analysis is an unbiased look at how much you spend and what you get out of
something. There are some good things about CB analysis and some bad things about it. Here is
a list of these:

Advantages:

Focuses on data-driven decision-making: Most of the time, a cost-benefit analysis is based on

facts and data to help businesses and companies make decisions more easily and without being
influenced by personal preferences or biases. It can also give project managers factual evidence
to back up their new project ideas and show company executives how good they are.

Discovers hidden costs: When a company looks at the total cost of a project, they can find any
hidden costs or expenses they might not have known about before. There can be opportunity
costs and intangible costs, like a temporary drop in customer satisfaction if more resources are
put toward the project itself. But the cost-benefit analysis can also help companies find hidden
benefits, such as happier employees, which could lead to higher productivity and better work.

Provides a competitive advantage: It can help them come up with new ideas quickly and figure
out how to stay relevant in the market. Companies can stay competitive and make products and
services that are more appealing to potential customers by coming up with new ideas all the time
and doing a cost-benefit analysis on them. Using a cost-benefit analysis can also help them avoid
projects that might give them problems or problems that could cost them money or make them
less competitive.

Helps to Make Rational Decisions: A cost-benefit analysis is a tool that can help you make
decisions that are based on facts rather than your feelings. By writing down the costs, to the best
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of one's knowledge, one avoids the urge to start a business just because it sounds good or
because of an emotional connection to a vendor or an expected result. Costs and benefits have to
be looked at as objectively as possible when they are written down and weighed.

Disadvantages:

Does Not Account for All Variables: The apparent clarity that is offered by a cost-benefit
analysis can give a person the idea that they have considered all of the relevant factors, while in
reality there is much more information to take in. When in reality, the actual result is contingent
on a large number of factors that will play out over the course of time, performing a cost-benefit
analysis may provide the impression that one is aware of what to anticipate and has made a clear
and well-informed decision.

Not as effective for long-term projects: Because of the unpredictability of the variables and the
increased likelihood that they will shift over the course of the project's duration, cost-benefit
analysis is an excellent tool for businesses to use when working on shorter projects; however, its
use can become somewhat risky when applied to projects with a longer duration.

Requires substantial data: When conducting a cost-benefit analysis, it is in a company's best

interest to have access to a substantial quantity of data in order to guarantee that they are making
the most accurate prediction possible. If a company does not have sufficient data for the study, it
can result in incorrect information, which may in turn generate extra difficulties for businesses in
the future.

Removes Gut Instinct: On the other hand, trusting one's intuition and making choices based on
that feeling isn't always a bad strategy. Proceed with extreme caution if one has a strong intuition
that a particular course of action is the best one for his company, despite the fact that a cost
benefit analysis indicates that it might not be worth the expenditure. Act with the understanding
that one is taking a risk, and then analyze and evaluate the results so that one can proactively
change course if the costs truly do end up outweighing the benefits of the action.

Models of cost-benefit analysis take into account payback (the amount of time it takes to recoup
initial investments) as well as the accounting rate of return (annual revenue generated). When
compared to relying solely on ARR or Payback, conducting a cost-benefit analysis of an
investment typically yields better results than doing so.
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Question 4. Evaluate how you might carry out an investment project of your
choice (e.g. a new school building or the development of a local sports center)
to take into account a range of stakeholder interests.

Answer: A new school building is our selected investment project. In order to start with the
investment project, we must analyze the project’s stakeholders. They are the people or groups
who have something to gain (or loss) from your project’s outcome. All stakeholders need to be
identified before starting a new project. Include those who are impacted by the project, as well as
groups with the ability to influence the project. In the case of a new school building the related
stakeholders are:

·         Team members

·         Employees

·         Company owners

·         Investors

·         Sponsors

·         Financiers

·         Suppliers

·         Consultants

·         Customers (parents)

·         End users (students)

·         Government

·         Community

In carrying out an investment project of a new school building a range of stakeholder interests
need to be accounted for. As the project manager one has the responsibility to manage
stakeholder expectations. After identifying the stakeholder, the project manager then, begin the
process of building strong relationships with each one using the following method.
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Analyze stakeholders: Conduct a stakeholder analysis, or an assessment of a project’s key

participants, and how the project will affect their problems and needs. Identify their individual
characteristics and interests. Find out what motivates them, as well as what provokes them.
Define roles and level of participation, and determine if there are conflicts of interest among
groups of stakeholders.

Assess influence: Measure the degree to which stakeholders can influence the project. The more
influential a stakeholder is, the more a project manager will need their support. Think about the
question, “What’s in it for them?” when considering stakeholders. Knowing what each
stakeholder needs or wants from the project will enable the project manager to gauge his or her
level of support. And remember to balance support against influence.

Understand their expectations: Nail down stakeholders’ specific expectations. Ask for
clarification when needed to be sure they are completely understood.

Define “success”: Every stakeholder may have a different idea of what project success looks
like. Discovering this at the end of the project is a formula for failure. Gather definitions up front
and include them in the objectives to help ensure that all stakeholders will be supportive of the
final outcomes.

Keep stakeholders involved: Don’t just report to stakeholders. Ask for their input. Get to know
them better by scheduling time for coffee, lunch, or quick meetings. Measure each stakeholder’s
capacity to participate and honor time constraints.

Keep stakeholders informed: Send regular status updates. Daily may be too much; monthly is
not enough. One update per week is usually about right. Hold project meetings as required, but
don’t let too much time pass between meetings. Be sure to answer stakeholders’ questions and
emails promptly. Regular communication is always appreciated – and may even soften the blow
when you have bad news to share.

Investment for new the School building

A new school building might be needed to extend the facilities of a school or to facilitate the
increasing number of students. For simplicity of calculation and estimation, we will be
considering BDT as our currency of choice for investment. Initially, the main sources of costs for
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the school building are the building itself, purchase of land, construction of the building, interior
and exterior decorations and commodities etc. For the initial cost, we are estimating the
following.

SL. Sources of cost Description Cost

1 Land for building 10 katha, per katha at 60lac at mirpur  6 crore

2 Construction 5 storeyed building  3 crore

3 Interior and exterior Class room equipments & decoration  4 crore

Having years of experience as a student in the education sector we  aimed to identify the best
possible solution for its stake holders, the environment, local communities and other
stakeholders. The key considerations were: 

1. the initial capital outlay of the project (capex)

2. the ongoing operating expenditure from running the project (opex) 

3. the wider costs and benefits to the environment and other stakeholders.

Options  Key element Overall Benefits

cost (est.)

1. Slowly increase the building Lower initial 20  crore Low initial investment
to 5 sorey and start slowly cost, hence low less risk

Higher on going
cost

2. Complete building and Higher Initial 24 crore Maximum benefits

furnishing cost, provided to students and
community 
lower on going
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cost

3. Build the whole building but Medium initial 22 crore Majority benefits are
only purchase furnishing when and ongoing cost ensured with moderate risk
needed

The whole-life cost assessment of the solutions involved examining capital costs of construction
(e.g. concrete structures, table & desks, stationeries) as well as operating costs – e.g. Electricity
bill, water bill, salary of teachers. Although option 1 had a significantly lower initial capital
outlay, and 3 having lowest overall cost these would not be feasible as they don't ensure
stakeholders interests to the fullest. This only left option 2, despite it being most costly as it
ensures maximum satisfaction of stakeholders and most benefit to society is provided.