Page 36 - Money in Energy
P. 36
Money in energy -Investment Opportunities and risks 2010
The present value (PV) method aims at present valuing (discounting) all costs and benefits of the
project or cash flows (net benefits) to a specified date, the base year.The NPV method is a
powerful indicator of the viability of projects. However, it has its weakness in that it does not
relate the net benefit gained to the capital investment and to the time taken to achieve it.
However, it is a very useful method for choosing the least-cost solution, since it is the alternative
which fulfils the exact project requirements, and has the higher NPV that is where; NPV is net
present value, B benefit , C : cost , n period and r the discount rate. One of the advantages of the
NPV method is that is accounts for the time value of money. The NPV method determines the
worth of a project over time, in today’s dollars. The greater the NPV value of a project, the more
profitable it is. This method can be used to rate and compare the profitability of several competing
options
Usually, projects are undertaken because they have a positive net present value. That is, their
return is higher than the discount rate, which is the opportunity cost of capital. The calculation of
net present value is the most important aspect in project evaluation and its positive estimation, at
the designated discount rate, is essential before undertaking a project.
Internal Rate of Return (IRR)
Calculating the internal rate of return is a popular and widely used method in the evaluation of
projects. The internal rate of return (IRR) is that discount rate which equates the two streams of
costs and benefits of the project. If IRR is equal to or above the opportunity cost for a private
project or the social discount rate (as set by the government) in public projects, then the project is
deemed a worthwhile undertaking. Utilities, governments and development funds set their own
criteria for the opportunity cost of capital and for the social discount rate below which they will
not consider providing funds. Such criteria depend on the amount and availability of required
funds. Criteria also depend on the presence and expected return of alternative projects in other
sectors of the economy, the market rate of interest and the risk of the project . The main merit of
the IRR is that it is an attribute of project evaluation. Its calculation does not involve the
estimation of a discount rate; therefore, the evaluator avoids the tedious analysis .
Maximization of NPV while utilizing as a discount rate, the opportunity cost of capital is the
guiding principle for project evaluation. The internal rate of return is not the only criterion for
36 Etree Projects Consultants Pvt Ltd.
The present value (PV) method aims at present valuing (discounting) all costs and benefits of the
project or cash flows (net benefits) to a specified date, the base year.The NPV method is a
powerful indicator of the viability of projects. However, it has its weakness in that it does not
relate the net benefit gained to the capital investment and to the time taken to achieve it.
However, it is a very useful method for choosing the least-cost solution, since it is the alternative
which fulfils the exact project requirements, and has the higher NPV that is where; NPV is net
present value, B benefit , C : cost , n period and r the discount rate. One of the advantages of the
NPV method is that is accounts for the time value of money. The NPV method determines the
worth of a project over time, in today’s dollars. The greater the NPV value of a project, the more
profitable it is. This method can be used to rate and compare the profitability of several competing
options
Usually, projects are undertaken because they have a positive net present value. That is, their
return is higher than the discount rate, which is the opportunity cost of capital. The calculation of
net present value is the most important aspect in project evaluation and its positive estimation, at
the designated discount rate, is essential before undertaking a project.
Internal Rate of Return (IRR)
Calculating the internal rate of return is a popular and widely used method in the evaluation of
projects. The internal rate of return (IRR) is that discount rate which equates the two streams of
costs and benefits of the project. If IRR is equal to or above the opportunity cost for a private
project or the social discount rate (as set by the government) in public projects, then the project is
deemed a worthwhile undertaking. Utilities, governments and development funds set their own
criteria for the opportunity cost of capital and for the social discount rate below which they will
not consider providing funds. Such criteria depend on the amount and availability of required
funds. Criteria also depend on the presence and expected return of alternative projects in other
sectors of the economy, the market rate of interest and the risk of the project . The main merit of
the IRR is that it is an attribute of project evaluation. Its calculation does not involve the
estimation of a discount rate; therefore, the evaluator avoids the tedious analysis .
Maximization of NPV while utilizing as a discount rate, the opportunity cost of capital is the
guiding principle for project evaluation. The internal rate of return is not the only criterion for
36 Etree Projects Consultants Pvt Ltd.
