Decision Aid Framework For Investments
In Environment (DAFFIE). Investing In The
Environment; When Is It Too Much?
Author(s)
S. Vanassche, L. Vranken & P. Vercaemst
Abstract
DAFFIE provides a methodology to estimate the economic feasibility of
environmental investments. Typically, (mandatory) environmental investments
are unprofitable as such so that classical investment analysis provides
insufficient insights to assess their economic feasibility. Therefore, we evaluate
whether an industry or company has the carrying capacity for extra costs
associated with the introduction of environmental measures. In the DAFFIE
evaluation method, an investment is economically feasible when an industry or
company is able to maintain or strengthen its competitiveness which is defined
as the ability to maintain sufficient liquidity and solvency and to earn a return
from activities that exceeds the cost of capital in the long run. This implies the
use of financial ratio analysis. DAFFIE starts from the annual accounts of an
(average) company. The impact of the investment options is simulated into
projected accounts. Eight key financial ratios are calculated for the projected
statement with the investment options included and excluded. Finally, the
evolution of the key ratios is benchmarked against a reference group (e.g. total
industry in Flanders) to come to a conclusion on the feasibility of the investment
options. This methodology highlights the potential impact of unprofitable
environmental investments on the financial position of a company or industry.
The results are used to support environmental policy makers or to objectify
discussions between companies which are confronted with additional
investments due to environmental legislation, and governments which issue
emission permits. The paper describes the DAFFIE methodology in more detail
and illustrates its use with practical cases.
Keywords: environmental investment, financial ratio analysis, economical
feasibility, calculation model.
Keywords
environmental investment, financial ratio analysis, economical
feasibility, calculation model.
Related Book
Other papers in this volume
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