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3 Selection Criteria Guide This section presents some different measures of the economic value of an investment. The choice of which measure is used to evaluate an investment is determined by several factors. These factors include the investor's perspective, regulation, risk, financing, cash flow, comparison of mutually exclusive alternatives, similarity o f alternatives' benefits, whether the investment is fully defined in terms of its size and use, and so forth. Most of the economic measures are valid for most investments, and it is usually a good idea to compute several of the measures to better evaluate the investment. However, certain measures are clearly inappropriatefor some investments. The use of the internal rate of return to compare two projects with significantly different returns over time, for example, may result in inappropriate assumptions regarding the rate of return available through reinvestment of the cash inflow. Table 3-1 is a quick reference for identifying the appropriate economic measure for different investment featuresanddecisioncriteria. Lettersinthetableindicatewhetherthemeasureisrecommended,generally notrecommended,orcommonlyused. Ablankcellsignifiesthatthemeasureisacceptable. An"R'sig- nifies that the measure is recommended. However, this does not mean that the other economic measures are inappropriate. On the other hand, an "N" means that the measure is generally not recommended and may yield incorrect results and conclusions. Finally, "C" denotes that the measure is commonly used to evaluateinvestmentswiththespecificfeature. Inasmuchaseachinvestmentandinvestorisdifferent,the best measures to use cannot be categorically stated within a matrix as simple as this one. This matrix is simply a quick reference from which the reader can identify those measures he or she may want to investigate thoroughly. To be more explicit, the entries in the matrix should be viewed as general rules for which there will be many exceptions. For example, according to the investment decisions portion of the matrix, (TLCC)and revenuerequirements(RR)arenotlistedas"recommended'foranydecisions. Yetthesetwomeasures are clearly applicable for those cases in which the energy services provided by the alternatives are identical, or in which the energy service must be secured and cost is, therefore, the only issue. These measures are not recommended in general simply because they do not consider benefits or returns. A more detailed description of investment features and decision criteria in the matrix is in the next section. Included is a description (definition) of each of the terms identified as investment features and decisions. Also included is an explanation of each of the entries contained in the economic measure matrix; e.g., why was IRR recommended as opposed to not recommended for different investment features and decisions. In addition, each economic measure discussed includes a brief discussion of its use (whether recommended, commonly used, or not recommended) €or different investment features and decisions. The makix cannot include all possible investment feature and decision possibilities; nor can it include all possible combinations, e.g., acceptance or rejection of a mutually exclusive regulated investment. Explanations for the Economic Evaluation Measures Matrix Investment Features Investment after return: A significant investment (net negative cash flow in the year) is required after the investor has received some cash inflow from the project. ExplanationofEntries: IRRisnotrecommendedbecauseanetnegativeinvestmentafterapositivereturn can result in multiple positive IRR values, and because downstream investments are improperly discounted,i.e.attheIRRandnotattheinvestor'sdiscountrate. MIRRisacceptablebecauseitavoids both of these problems with IRR. 35PDF Image | A Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies
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