New Decision Method for Environmental Capital Investment

Abstract

The purpose of this chapter is to establish a decision-making method for evaluating capital investments in environmentally friendly projects. This method enables management decisions to be made appropriately under highly volatile conditions while promoting good corporate environmental behaviour. This chapter contributes to expand decision-making methods for environmental capital investment in environmental accounting. There are two challenges in establishing this method. The first is to convert environmental impact reduction into internal corporate value creation, which is done using the life-cycle impact assessment method based on endpoint modelling (LIME) tool described in the chapter. The second is to incorporate management decision flexibility in the appraisal of environmental investment, which is done using real options theory. The total economic value of the environmentally friendly projects then includes net present value, environmental impact reduction value and managerial flexibility value. This chapter describes how this new environmental investment decision-making method was applied to a hybrid vehicle project in order to verify its effectiveness. The result indicates that the project which appears unattractive when evaluated using existing methods can be shown as attractive when this method is applied. It is considered that this method can contribute to the promotion of innovative environmentally friendly projects.