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Discussion In an analysis, ihe time points selected may all be equal (they generally are), different, or in combinations. For example, an independent power producer might wish to evaluate a central receiver plant that would require 2 years to build. The present year could be the base year, 1995 could be the investment year (point i n time at which plant would go into service, or inservice date), and 1992 could be the dollar year (year for which material costs are available). Understanding will improve by providing time p i n t information in the reported results of an analysis. If nothing else, it is imperative that the dollar year be reported. Results are meaningless to the reader if values are reported and the dollar year of those results is missing. Results reported in any detail should also include all information pertaining to time period assumptions. Investment lifetime, depreciation periods, and finance periods are all values obtained outside of the analysis but represent €actors to be included in the evaluation. For example, an investment might have an estimated useful life of 30 years, be financed over a 20-year period, and be depreciated over 15 years. The selection of an appropriate analysis period is essential. Many times the analysis period is equd to the investment's life span. However, other factors that should be considered include the investor's time horizon and perspective and the decision to be made (acceptheject or choice among alternatives). The investor'stimehorizonisoftenusedastheanalysisperiod. Forexample,theindependentpowerproducer evaluating a central receiver plant is planning to sell the plant after 10 years and the central receiver plant under evaluation has an investment life of 30 yeas. In this example, the analysis period should be 10 years. A longer study period, however, should be used for analyses conducted from society's perspective (30 years or more in most cases). Evaluations incorporating acceptheject decisions should use investment life as the analysis period, subject to the constraint of the investor's time horizon. When choosing among alternatives, it is generally agreed that the same study period should be used when evaluating each of the alternatives. Problems can arise if the investment lives of the alternatives differ. More detailed information on projects with unequal lives can be found in the Unequal Lifetimes subsection in Section 5, and in Ruegg & Marshall (1990). Discount Rates Time value is the price put on the time that an investor waits for a return on an investment. A dollar received today is worth more than a dollar received tomorrow because the dollar today can be invested toearninterestimmediately. Conversely,adollarreceivedtomorrowisworthlessthanadollarreceived today because the opportunity to earn interest on the dollar is lost. The discount rate acts as a measure of this time value and is central to the calculation of present value. Discount rates are often used to account for the risk inherent in an investment (risk-adjusted discount rates are discussed in the Uncertainty andRisksubsectioninSection2). Assuch,thechoiceofadiscountrateisimportanttoanyeconomic analysis. Discussion Analyses can be performed using either current or constant dollar cash flows, but it is important to remain consistentthroughoutthestudy. Forexample,adiscountrateisusedtocalculatethepresentvalueofa future payment (present value calculations are addressed in a later section), and a discount rate either includes the effects of inflation (nominal) or excludes inflation (real). The discount rate used in the 5PDF Image | A Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies
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