Page 35 - Money in Energy
P. 35
Money in energy -Investment Opportunities and risks 2010
expenditure and income occurs after commissioning. Such future financial flows will fluctuate
according to time and circumstances. Correspondingly, these will have a different financial value
than flows occurring during project evaluation. Therefore, the time value of money is highly
important for capital-intensive long life projects, like electricity supply industry .
Discounting : In general, financial flows occur after commissioning, they do not occur during
project evaluation. In evaluation stage, the project developers and decision makers have to know
if the project is feasible or not. So cash flow tables are important for developers for decision
making. But cash flows occurring at different times cannot be readily added, since a dollar today is
different from a dollar a year later. The time value of money states that a dollar today is worth
more than a dollar at some time in the future.
There is variety of reasons for this: risk, inflation, opportunity cost, etc. Inflation; future incomes
are eroded by inflation The existence of risk; an income or expenditure which occurs today is a
sure amount, future income or expenditure may vary from anticipated values; The need for a
return-by undertaking investment and forgoing expenditure today, an investor expects to be
rewarded by a return in the future .
An entrepreneur expects to gain a premium on his investment, to allow for the following three
factors: inflation, risk taking and the expectation of a real return. That is, he expects to regain his
money, plus a return, which tallies with the market and his estimation of these three factors .
Money today will be more valuable than tomorrow’s money because of risk and expectation of
reward by foregoing today’s expenditure, even if inflation is ignored or allowed. To an investor
point of view, a dollar today is more valuable than tomorrow’s dollar because it can be invested
immediately and can earn a real income, that is, a return higher than inflation. Today’s dollar will
equal tomorrow’s dollar plus a real value.
Net Present Value Calculation
Net present value is computed by assigning monetary values to benefits and costs, discounting
future benefits and costs using an appropriate discount rate, and subtracting the sum total of
discounted costs from the sum total of discounted benefits. Discounting benefits and costs
transforms gains and losses occurring in different time periods to a common unit of measurement.
Programs with positive net present value increase social resources and are generally preferred .
35 Etree Projects Consultants Pvt Ltd.
expenditure and income occurs after commissioning. Such future financial flows will fluctuate
according to time and circumstances. Correspondingly, these will have a different financial value
than flows occurring during project evaluation. Therefore, the time value of money is highly
important for capital-intensive long life projects, like electricity supply industry .
Discounting : In general, financial flows occur after commissioning, they do not occur during
project evaluation. In evaluation stage, the project developers and decision makers have to know
if the project is feasible or not. So cash flow tables are important for developers for decision
making. But cash flows occurring at different times cannot be readily added, since a dollar today is
different from a dollar a year later. The time value of money states that a dollar today is worth
more than a dollar at some time in the future.
There is variety of reasons for this: risk, inflation, opportunity cost, etc. Inflation; future incomes
are eroded by inflation The existence of risk; an income or expenditure which occurs today is a
sure amount, future income or expenditure may vary from anticipated values; The need for a
return-by undertaking investment and forgoing expenditure today, an investor expects to be
rewarded by a return in the future .
An entrepreneur expects to gain a premium on his investment, to allow for the following three
factors: inflation, risk taking and the expectation of a real return. That is, he expects to regain his
money, plus a return, which tallies with the market and his estimation of these three factors .
Money today will be more valuable than tomorrow’s money because of risk and expectation of
reward by foregoing today’s expenditure, even if inflation is ignored or allowed. To an investor
point of view, a dollar today is more valuable than tomorrow’s dollar because it can be invested
immediately and can earn a real income, that is, a return higher than inflation. Today’s dollar will
equal tomorrow’s dollar plus a real value.
Net Present Value Calculation
Net present value is computed by assigning monetary values to benefits and costs, discounting
future benefits and costs using an appropriate discount rate, and subtracting the sum total of
discounted costs from the sum total of discounted benefits. Discounting benefits and costs
transforms gains and losses occurring in different time periods to a common unit of measurement.
Programs with positive net present value increase social resources and are generally preferred .
35 Etree Projects Consultants Pvt Ltd.
