Equivalence of the Present Worth and Revenue Requirements Methods of Capital Investment Analysis

Abstract

Abstract The minimum revenue requirements method of capital investment analysis is widely used by investor-owned utilities. The present worth method is more familiar to graduates of industrial engineering curricula. This paper considers a particular variant of the minimum revenue requirements method and presents the assumptions that must be adopted to insure exact equivalence between the two methods. A numerical example is provided to illustrate the tabular computation algorithm commonly used by practitioners of both methods. Several models for computing revenue requirements are given, each based on a different view of the cost of capital. The results of these computations are compared to those obtained when the present worth method is used to treat borrowed funds both implicitly and explicitly. Theorems from Oso [13] are used to generalize the results. Additional theorems extend findings regarding the equivalence of the minimum revenue requirements and the present worth methods.