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Measuring and Improving Productivity
Published in James William Martin, Operational Excellence, 2021
The NPV method compares the present value of a project's future cash flows to an initial investment cost. The comparison is made relative to its minimum rate of return compared to a safe investment. The rule is that an investment should be undertaken if its NPV is positive or its return is higher than what could be obtained from a safer investment. It is important to determine a project's expected cash inflows relative to project risks throughout the life of the project to ensure the NPV is accurate. As an example, in some projects, the cash inflows occur early while in other projects they occur toward the end of the project. Cash flows derived from the latter scenario will have more risk because external factors have more time to influence the project.
A Simple Introduction to Financing Energy Management Projects
Published in Eric A. Woodroof, Albert Thumann, How to Finance Energy Managment Projects, 2021
NPV is useful because you can convert future savings cash flows back to “time zero” (the present), and then compare to the cost of a project. If the NPV is positive, the investment is acceptable. In capital budgeting, the discount rate used is called the “hurdle rate” and is usually equal to the incremental cost of capital.
Financing and Performance Contracting
Published in Stephen A. Roosa, Steve Doty, Wayne C. Turner, Energy Management Handbook, 2020
Eric A. Woodroof, Stephen A. Roosa
NPV is useful because you can convert future savings cash flows back to the present, and determine whether they equal or exceed the project cost [11]. If the NPV is positive, the investment is acceptable. In capital budgeting, the discount rate used is called the hurdle rate and is usually equal to the incremental cost of capital.
A techno-economic survey on high- to low-temperature waste heat recovery cycles for UK glass sector
Published in International Journal of Green Energy, 2023
Narges H. Mokarram, Zhibin Yu, Muhammad Imran
The price per unit of electricity sold to the grid, or c elec, is 0.1 (Kolahi et al. 2016). After determining the annual profit, it is possible to estimate other economic metrics, such as the (dynamic) payback time (PP), internal rate of return (IRR), and multiple of invested capital (MOIC). PP is the length of time needed to recoup an investment’s expenditure. In other words, it is the length of time needed for the NPV to progressively become zero. The return on investment is seen differently by IRR, on the other hand. IRR is the interest rate I at which the cash flow’s NPV, or net present value, is equal to 0. MOIC is a different investment return factor from IRR in that it places more emphasis on “how much” than “when.” It contrasts the initial investment with the present value of the projected profit flows during the project’s lifetime. PP, IRR, and MOIC values can be calculated using Eqs. (25–27) (Georgousopoulos et al. 2021b; Kalogirou 2014). Since the value of IRR cannot be determined through simple calculations, the iterative technique is used.
Internal rates of return and shareholder value creation
Published in The Engineering Economist, 2021
It is worth noting that this approach enables a deeper analysis of economic profitability than the traditional NPV allows. The traditional NPV analysis does not distinguish whether value is created owing to a high economic efficiency (and a small project scale) or to a large project scale (and a small economic efficiency). In contrast, the approach we have illustrated is grounded on a product structure which explicitly highlights the sources of value creation: Economic efficiency () and project scale (C). In the example above, the reduction in the NPV is due to a decrease in the economic efficiency, while the project scale remains unvaried. More precisely, the project has a scale of $800 in both scenarios (constant WACC and time-varying WACC). However, in the scenario with time-varying WACCs, the second-year WACC is higher than the first-year WACC, which triggers two conflicting effects:the average WACC () increases from 15% to 16.49%the relative project scale () is reduced from to
Determination of optimum insulation thickness by life cycle cost analysis for residential buildings in Turkey
Published in Science and Technology for the Built Environment, 2021
Nusret Aydin, Atilla Biyikoğlu
The LCCA method is used in calculating the optimum insulation thickness. The total heating and cooling costs over a period of time of N years is evaluated in the present value using the Present Worth Factor (PWF) (Ozel 2008). PWF is an integral component in the calculation of present worth of cash flow under the discounted cash flow model of investment valuation. Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project. PWF is used to calculate the present value of costs for a given time. Therefore, PWF is used to calculate the present value of the total heating and cooling costs for the lifetime of 30 years in this study. The present worth factor is calculated based upon the inflation and interest rates by Equations (24) and (25) as follows: where, PWF is the present worth factor, i is the interest rate (TCMB 2018a), g is the inflation rate (TUİK 2018), r is the actual interest rate and N is the lifetime in years. The parameters used in PWF calculations are given in Table 3.