Principles of Capital Budgeting for the Assessment of PPP Projects

Abstract

Capital budgeting, or investment appraisal, is the planning process used to determine whether a long-term investment in tangible assets, such as a new hospital building or item of medical equipment, is worth the deployment of cash through the capitalisation structure (debt and equity). Traditional capital budgeting/finance textbooks focus their attention on private investment. However, capital budgeting can also be used by public authorities when planning and appraising PPP projects. In this case, the goal is to find the point of economic and financial equilibrium, which means that project cash flows are affordable to the public authority while also remunerating private investors adequately for their costs. This chapter offers an overview of the essentials of capital budgeting, providing guiding principles for public managers, investors and financial analysts.