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4 EconomicMeasures This section includes an overview of the procedures involved when developing net present value (NPV), total life-cycle cost (TLCC), levelization, unadjusted and modified internal rate of return, simple payback (SPB), discounted payback (DPB), benefitkost (B/C) rati-os, savingslinvestment ratios (SIR), B/C ratios related$0integratedresourceplanning,andconsumerlproducersurplusanalyses. Evaluationsoftware(the diskette is provided with this manual) has been developed to help analysts tackle investment problems that aretraditionallydifficulttoevaluatemanually. Theevaluationsoftwareautomatestheexactequationsfor the first eleven economic measures in this section. It is hoped that this program will improve the speed and precision with which analysts apply the methods and procedures in this section. The selection criteria guide presented in the previous section relates to this section by suggesting which economicmeasuresaremostappropriateforaspecificanalysis. Differenteconomicmeasuresapplyto different situations, and it is generally a good idea to use several when evaluating an investment. The economic measures described in detail in this section can be used to compare alternative investments orprojects. Themethodsforusingthesemeasuresascomparisontoolsarefairlystraightforwardandare covered in more detail in the specific section dedicated to the measure. For example, cost-effective alternatives are those with the lowest TLCC,revenue requirements (RR), LCOE, SPB, and DPB; and the highest NPV, internal rate of return (IRR), modified internal rate of return (MIRR), B/C, and SIR. However, the analyst should be aware that when comparing alternatives, different measures may not alwaysprovidethesameanswer. Forexample,simplepaybackrequirementsrejectanalternativethat, while having a longer payback period, has strong long-term returns. Sometimes the objective of an evaluation will be to find the most cost-effective combination of separate investments. If the objective is to determine the most cost-effective combination of air-conditioner size and amount of insulation, then each combination should be evaluated collectively, not on a component- by-component basis, because separate components of the combinations affect one another. So, when considering a more efficient air conditioner and the upgrading of insulation, the most cost-effective alternative is probably a combination of improvements to both the air conditioner and the insulation (Ruegg and Petersen 1987). Net Present Value Infroduction The NPV of a project is one way of examining costs (cash outflows) and revenues (cash inflows) together (Palm and Qayum 1985). A NPV analysis can be composed of many different cost and revenue streams. The analyst must know the form of the different streams (current or constant dollars), so the correct discount rate can be used for the present value analysis. Alternatively, the cash flows can be adjusted to reflect the form of the discount rate. NPV analysis is recommended when evaluating investment features and decisions such as mutually exclusive projects and social costs. With mutually exclusive projects, NPV does not fail to recognize the difference in the size of investment alternatives (i.e., a large investment allows the investor to invest more atafavorablereturn). Forsocialcosts,NPVisnotonlyacceptablebutiscommonlyusedwhenevaluating investments from a societal perspective. It is also recommended that NPV be used in most other evaluations as well, specifically as a secondary measure to check the validity of any primary measure used. 39PDF Image | A Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies
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