Using cost-benefit analysis to appraise investments
An United Utilities case study

Page 1: Introduction

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Every morning millions of people in the UK have a bath or shower, make a cup of tea and wash the dishes before they start the day. Thousands of businesses use water in hundreds of different ways - from hairdressers and hospitals to factories and farms. Yet most people do not consider where water comes from or where it goes once they have finished using it. It is the job of United Utilities to...
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Page 2: Drivers for investment

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Businesses invest for many reasons, such as: to grow an existing business. United Utilities expanded by building new assets such as storage tanks and water treatment works to replace and improve existing facilities. In United Utilities’ case, this has involved upgrading or replacing sewers and water mains to meet legal or environmental requirements. External drivers There were two main...
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Page 3: External factors affecting investment appraisal

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Any investment requires initial capital expenditure (capex). Appraising an investment project involves weighing up the likely future return on that investment (ROI) against the expenditure. Methods often used include calculating the Accounting Rate of Return and the Payback period: Accounting Rate of Return (ARR) is calculated as the average annual profit that is expected over the life of the...
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Page 4: Investment for the Millom project

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The original budget for the Millom project was set at £14.5 million. However, this was before a full evaluation of the social costs was carried out. Having consulted with the Environment Agency, United Utilities aimed to identify the best possible solution for its shareholders, the environment, local communities and other stakeholders. The key considerations were: the initial capital outlay...
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Page 5: Working with stakeholders

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In a public service industry like water, gas or electricity, it is essential to make investment decisions that respect the requirements of many different stakeholders. United Utilities sought to find a solution that met with commercial criteria, met budget and also minimised negative impacts on the community. By working closely with the Environment Agency, United Utilities was able to come up with...
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Page 6: Conclusion

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United Utilities is a major partner in the economic life of the North West. It manages huge reservoirs such as Thirlmere and Haweswater in Cumbria and treats the wastewater from homes and businesses across the North West before disposing of it safely back to the environment. It is committed, through investments, to providing sustainable solutions to business and environmental challenges. The...
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