Net Present Value Method Research Articles

Economic Studies on the Production of Fruit Juice from a Locally Sourced Fruit ‘African Star Apple’

The economic evaluation for the production of fruit juice from the Africa star apple otherwise known as ‘Agbalumo’ in the south western part of Nigeria was evaluated using the NPV (Net Present value) and IRR (Internal Rate of Return) methods assuming a uniform cash flow over a 10-year plant life. Sensitivity analysis was conducted by varying the number of production days (330, 300 and 250 days) at 100% plant capacity and varying the plant capacity (100, 85 and 70%) for a 330-day production schedule. Some components of the operating cost reduced with number of days and plant capacities. The production cost and product cost per unit increased with either plant capacity utilization or the number of days. It was observed that product cost/ 500ml Tetra Pak of Agbalumo juice at 85% and 70% stood at ₦37.48 while payback time/profitability percent had better index at 300 and 250 days compared to 330 days of plant operation. The results further indicated that the plant should not be operated for less than 250 days and plant capacity utilization of 70% in the year. Flexibility in the plant capacity utilization in the range of 70%-85% for 330 days shows a good economic performance as well as result of the NPV and IRR for this operating condition.

Economic evaluation of agricultural land to assess land use changes

Land-use models express the relationship between various driving forces of land-use changes and are increasingly employed in practical applications to predict possible future land uses. The relationship between the agricultural land market and land-use changes is often neglected in such models. The objective of this study is to assess the production values of agricultural land to be integrated in an operational land-use model with the aim to improve understanding of land-use changes in all 28 European Union countries. This economic evaluation of agricultural land is based on the Net Present Value (NPV) method, a method that aims at uncovering the operational production values of land rather than real estate market value. The scientific relevance of this work is the development of a comprehensive methodology for the economic evaluation of agricultural land uses in different EU countries, the integration of economic production values of land to the local suitability approach in the studied land-use model and the provision of a EU-wide database of the NPVs of agricultural land uses, including various energy crops.

Life cycle cost analysis of commercial buildings with energy efficient approach

Summary In any construction project, cost effectiveness plays a crucial role. The Life Cycle Cost (LCC) analysis provides a method of determining entire cost of a structure over its expected life along with operational and maintenance cost. LCC can be improved by adopting alternative modern techniques without much alteration in the building. LCC effectiveness can be calculated at various stages of entire span of the building. Moreover this provides decision makers with the financial information necessary for maintaining, improving, and constructing facilities. Financial benefits associated with energy use can also be calculated using LCC analysis. In the present work, case study of two educational buildings has been considered. The LCC of these buildings has been calculated with existing condition and with proposed energy efficient approach (EEA) using net present value method. A solar panel having minimum capacity as well as solar panel with desired capacity as per the requirements of the building has been suggested. The comparison of LCC of existing structure with proposed solar panel system shows that 4% of cost can be reduced in case of minimum capacity solar panel and 54% cost can be reduced for desired capacity solar panel system, along with other added advantages of solar energy.

Application of Monte Carlo method in economic optimization of cogeneration systems – Case study of the CGAM system

Similar to other energy systems, economic analysis of cogeneration systems is one of the most important steps in their design procedure. In this paper, a novel method is suggested for economic optimization of cogeneration systems. This method provides an opportunity to consider uncertainties in various economic parameters. Accordingly, by providing the probability distribution function of the net present value or payback time, this method offers further insights in economic evaluations of cogeneration systems. As a common practice for demonstrating novel methodologies in design and optimization of cogeneration systems, the proposed method of this study is applied to a well-known cogeneration case in the literature. In a coupled scheme, Monte Carlo approach is applied with net present value method to optimize the system. Accordingly, the obtained result is the probability distribution function of the net present value of the maximum profit. The results verify that compared to previously used methods which did not consider uncertainties in economic parameters, this probability distribution function provides a more general point of view on the profitability of the system. Therefore, by showing economic risks, these considerations make investments in this cogeneration system far more interesting.

Core Model of the Forestry Investment Project Decision Support System Based on the Real Option

The forestry investment project has the typical characteristics such as the flexibility, phases, uncertainty, and so on, and needs reasonable applicable decision method and decision support system. The traditional forestry investment project evaluation mostly adopts the net present value method, and ignores option property of the forestry investment project, which is easy to cause the decision-making bias and erroneous judgment. This paper analyzes the real option characteristics of the forestry investment project from the perspective of real option, constructs the analysis model of real option based on the binomial tree theory, and applies the instance to verify. The instance proves that forestry investment project decision will be more scientific based on the real option model. Finally, on the basis of this model, the forestry investment project decision support system is preliminarily studied.

An estimate of the energy production potential of agricultural biomass in the Łódź province

This paper presents a model of uncultivated agricultural land under appropriately selected energy crops. The main goal of this work is to estimate energy production potential of fallow soil and fallow land in the Łódź Province on the basis of selected energy crops and to calculate the minimum price of energy crops. The Net Present Value (NPV) method was used to calculate the minimum price, and the literature studies to build the model using. The following analysis verifies the main research hypothesis, i.e., that the Łódź Province has a theoretical and economical energy-production potential of biomass in the areas of fallow soil and fallow land. The hypothesis was verified positively. The study shows that practicing energy willow achieved the lowest price for generation of 1 MWh.

Aplikasi Sistem Pendukung Keputusan Untuk Menentukan Harga Layanan Teknologi Informasi

The effects of recency of information technology (IT) will be invested impaired, this makes it difficult to assess the information technology investment. This study intend to calculate the production cost of IT services with the activity based costing system method, to assess IT investments. This study make the position of IT department as an independent business that sells services to other departments within the organization (IT as a service - ITaaS). To assess the IT investment carried out in 3 stages, 1) Do departmentalize overhead, 2) Calculate the production cost of IT services,3) Perform investment analysis using cash flow simulation with the net present value method. The result of this study is decision support system information to assist management in determining the implementation of IT investments, to do their own (in-house) or purchased from an outside party (outsourced). In this way, losses due to errors in executing IT investments can be avoided, because the analysis is done prior IT investments held. Keyword s : IT Investment; Net Present Value (NPV); Activity-Based Costing system (ABC);Value chain; IT as a Service (ITaaS)

Techno-economical Analysis of Photovoltaic-battery Storage Systems for Peak-shaving Applications and Self-consumption Optimization in Existing Production Plants

With rising electricity costs, increasing environmental awareness and aggravating legal requirements, production plants demand innovations in the field of energy efficiency and utilization of renewable energies. Here we perform a techno-economical assessment of photovoltaic-battery storage systems for industrial peak-shaving and self-consumption applications. In order to consider individual load profiles, different battery types, aging mechanisms, varying costs for electricity and storage capacity, a simulation tool was developed. Net present value method was applied to evaluate the costs over the systems’ service life. The case study shows positive net present values for system configurations with large photovoltaic systems compared to storage capacity.

The Real Reinvestment Rate Assumption as a Hidden Pitfall

The paper explores a few hidden problems of the reinvestment rate assumption. The automatism of net present value method creates and applies a very special reinvestment rate assumption. This assumption does not disturb the evaluation of investment projects with orthodox cash flow patterns. However, in the case of unorthodox cash flow patterns, automatism constructs a serious mistake in the calculations. In this case, the net present value provides wrong information about the economic efficiency. However, according to the general academic opinion, the net present value method is suitable for evaluation in the case of unorthodox cash flow patterns as well, as there can be only one net present value as opposed to the opportunity of several internal rates of return. The paper sets out to prove that this way of evaluation is wrong, and works out a solution based on the real economic basis.

SIMULATION DECOMPOSITION: NEW APPROACH FOR BETTER SIMULATION ANALYSIS OF MULTI-VARIABLE INVESTMENT PROJECTS

1.INTRODUCTIONIn this paper we are interested in exploring how typical based investment analysis can be enhanced to offer better managerial decision-support in terms of providing better actionable information about threshold values for identified important-to-the-investment variables that affect investment profitability.Our focus is on analysis that is performed before the investment decision. The decision support before investment is actionable, because it is before the investment that decision managers are often in a position that allows them to still plan and steer investments towards the most profitable configurations, and by their actions ensure that critical to profitability issues are properly accounted for.What we propose is a new approach that we call simulation decomposition. The method is based on setting artificial (expert chosen) thresholds to divide the possible value distributions of the most important uncertain variables of an analyzed investment. Typically in Monte Carlo these distributions are from where the simulator draws random variable values. After having decomposed each variable's uncertainty, or range, into sub-ranges, the combinations of these sub-ranges are listed. When the is run, the results are registered separately for each combination, in addition to the overall results. This allows for constructing a separate distribution of outcomes for each combination that is a sub-distribution of the overall result. By studying the sub-distributions managers can infer important information about the profitability-critical threshold values for each variable that will help them plan their actions with regards to managing the investment better.Modern investment decision-making is most often an exercise that involves comparing the value of an upfront investment cost and a stream of uncertain future cash-flows that is expected to result from the prospective investment. In practice, the methods for the job are the capital budgeting methods, such as the net present value (NPV) method, the pay-back method, and the internal rate of return method (IRR) that are often used together with complementary sensitivity, scenario, and analysis methods (Block, 2007; Graham and Harvey, 2001; Ryan and Ryan, 2002). Real option analysis (Amram and Kulatilaka, 1998; Trigeorgis, 1995) is among the latest additions into the investment analysis toolkit of managers and has been gaining a foothold in academic research, as well as, a following in the industry. The benefit of real option analysis over the classical methods is that it is able to capture the value of managerial flexibility that is to be found within investments, and when investments are considered as a whole. Often a mixture of different investment analysis techniques is used simultaneously in hopes of gaining a better holistic picture of the situation surrounding the investment and in order to comprehensively treat the risks involved.Simulation and more specifically Monte Carlo (commonly attributed to Stanislaw Ulam), is a technique that has been used in asset valuation since the late 1970's, e.g., (Boyle, 1977), and in investment analysis of real investments for more than two decades. In connection with the classical profitability analysis methods has been used, e.g., in enhancing scenario analysis for complementing the investment analysis (Sheel, 1995). Simulation has also been used together with dynamic system models in investment analysis and profitability evaluation of, e.g., mining and oil investments (Johnson et al., 2006; O'Regan and Moles, 2001 ; O'Regan and Moles, 2006; Sontamino and Drebenstedt, 2014; Tan, Anderson et al., 2010), and to offer a better understanding of how uncertain variables affect profitability of energy investments (Bastian-Pinto, et al., 2010; Boomsma et al., 2012; Kozlova et al., 2015; Monjas-Barroso and Balibrea-Iniesta, 2013; Reuter et al. …

Modified Profitability Index and Internal Rate of Return

Modified Profitability Index and Internal Rate of Return Armênio de Souza Range, José Carlos de Souza Santos, José Roberto F. Savoia Abstract Both the internal rate of return (IRR) and the net present value(NPV) methods present well-known limitations. The drawbacks of the IRR include multiple rates, the assumption that cash flows are reinvested at the IRR, and the scale effect, whereas in the case of NPV the limitations relate to the choice of the measurement units as well as to the project’s scale. In many cases, applying these two methods produces conflicting rankings for alternative investment projects. Two alternative models were developed to overcome these pitfalls: the modified internal rate of return method (MIRR), which overcomes the IRR’s limitations, and the profitability index (PI), which resolves the limitations of NPV. The purpose of this paper is to show that there are no inconsistencies between the PI and MIRR, and that it is preferable to use a modified rate, the MPI, which is obtained by subtracting the cost of capital from the standard PI. Full Text: PDF DOI: 10.15640/jibe.v4n2a2

The Capital Budgeting Process of Healthcare Organizations: A Review of Surveys

Several surveys have been administered over the last 40 plus years to learn about capital budgeting practices of healthcare organizations. In this report, we analyze and synthesize these surveys in a four-stage framework of the capital budgeting process: identification, development, selections, and post-audit. We examine three issues in particular: (1) efficiency of for-profit hospitals relative to not-for-profit hospitals, (2) capital budgeting practices of the healthcare industry vis-à-vis other industries, and (3) effects of healthcare mergers and acquisitions on capital budgeting decisions. We found indirect evidence that for-profit hospitals exhibited greater efficiency than not-for-profit hospitals in recent years. The acquisition of not-for-profits by for-profits is credited as the primary reason for growth of multihospital systems; these acquisitions may have contributed to the more efficient capital budgeting practices. One unique attribute of healthcare is the dominant role of physicians in almost all aspects of the capital budgeting process. In agreement with some researchers, we conclude that the disproportionate influence of physicians is likely to impede efficient decision making in capital budgeting, especially for nonprofit organizations.

KONFLIKTI U RANGIRANJU KONKURENTNIH INVESTICIONIH PROJEKATA

There are numerous methods while assessing efficiency of investment ventures that are based on discount technique and which take into consideration time value of money. All these methods have both good and bad sides. Hence the methods of net present value and internal rate of return represent basic methods in this group; we will focus our attention on those flaws which result in paradoxical situation in ranking projects and alternative decision-making while choosing specific investment variations. When it comes to independent projects there is a rule that if the project has positive net present value or in other words if the internal rate of return is higher than the rate of investment criterion, the project should be accepted; otherwise, if the net present value is negative or if the internal rate of return is lower than the rate of investment criterion, the project should be rejected; if the net present value is equal to zero or in other words if the internal rate of return is equal to the rate of investment criterion, one should behave indifferently towards such investment proposal. In case of choosing one among many projects that are available to a decision-maker while all of them are assessed with positive net present value and with internal rate of return higher than rate of investment criterion, should one give advantage to a project with higher net present value and less internal rate of return or to a project with less net present value and higher internal rate of return?.

Economic and environmental analysis of five Chinese rural toilet technologies based on the economic input–output life cycle assessment

Building toilets are critical infrastructure to promote public health. The current sanitation technology in developed countries is based on diluting human excreta with large volumes of centrally provided potable water. This approach is a poor use of water resources and is also inefficient and energy intensive, which is not suitable for water-shortage rural areas of northern China. Therefore, comprehensive schemes of Chinese rural toilets, including standard flushing, rainwater harvesting flushing systems, urine separation and composting systems, were considered in this study by means of five scenarios simulation. Economic net present value method was adopted for economic analysis and economic input–output life cycle assessment model based on Chinese economic input–output table and life cycle database was developed for comparing energy consumption and greenhouse gas emission implications, aiming to guide the selection of toilet schemes. A mountainous village in Mentougou District of Beijing was taken as the example. Based on total cost and net present value method, the results showed that scenario 5, namely urine diverting composting systems, outweighed the other four alternatives on the cost even in the different discount rates ranging from 0% to 10%; scenario 3, namely urine-diversion and potable water flushing toilet, was sub-optimal economic solution which net present value was negative when discount rate was over 8%. This study also present scenario 3's environmental superiority to scenario 5 on energy consumption and greenhouse gas emission. These two technologies were proved viable options for standard flushing toilet. Nevertheless, for another two scenarios of rainwater harvesting flushing toilets, they had higher amounts of investment, energy consumption and greenhouse gas emission due to the high investment on rainwater tank construction. Moreover, the vast majority of construction materials required high energy consumption and were carbon intensive sectors in China. Finally, some suggestions were given for the implementation of urine separation toilets and composting toilets in the practical application. Meanwhile, impact of the rising water price in selecting alternative technologies and tradeoff about the priority consideration for rural toilet technologies were analyzed in this study. Considering the great significance of rainwater harvesting toilet technology to save the water resources, measures of how much government should subsidize for guarantee its extension and motivation was discussed as well.

Sustainable coal consumption and energy production in India using life cycle costing and real options analysis

India has plenty of energy resources for meeting its electricity demand and scaling up capacity addition. Energy production and its consumption from coal, gas and liquid fuel accounts for roughly two-third of the total power generated. Various factors govern in decision for strategic investments on energy projects based on coal, gas and liquid fuel consumption. Increasing recurring cost and environmental factors are the major concern for energy projects. Therefore, investments on energy projects need to be optimized. The traditional method of net present value (NPV) for evaluating projects investment decisions and capturing opportunity in conflicting environments is becoming quite unreliable. This may impact achieving national gross domestic product of the country. Of recent time, life cycle management based life cycle costing (LCC) approach to evaluate energy projects the LCC is emerged from United Nation’s global environmental agenda of sustainable consumption and production. This paper is an attempt to address investment issues using LCC approach for deployment of coal based project. The paper also utilizes Real Options Analysis (RoA) theory. Finally, the paper integrates LCC and RoA in energy and power sector to address the investment issues and thus support UN mandate for sustainable development in emerging economies like India.

INCLUDING RISK IN ECONOMIC FEASIBILITY ANALYSIS:A STOCHASTIC SIMULATION MODEL FOR BLUEBERRY INVESTMENT DECISIONS IN CHILE

ABSTRACT The traditional method of net present value (NPV) to analyze the economic profitability of an investment (based on a deterministic approach) does not adequately represent the implicit risk associated with different but correlated input variables. Using a stochastic simulation approach for evaluating the profitability of blueberry (Vaccinium corymbosum L.) production in Chile, the objective of this study is to illustrate the complexity of including risk in economic feasibility analysis when the project is subject to several but correlated risks. The results of the simulation analysis suggest that the non-inclusion of the intratemporal correlation between input variables underestimate the risk associated with investment decisions. The methodological contribution of this study illustrates the complexity of the interrelationships between uncertain variables and their impact on the convenience of carrying out this type of business in Chile. The steps for the analysis of economic viability were: First, adjusted probability distributions for stochastic input variables (SIV) were simulated and validated. Second, the random values of SIV were used to calculate random values of variables such as production, revenues, costs, depreciation, taxes and net cash flows. Third, the complete stochastic model was simulated with 10,000 iterations using random values for SIV. This result gave information to estimate the probability distributions of the stochastic output variables (SOV) such as the net present value, internal rate of return, value at risk, average cost of production, contribution margin and return on capital. Fourth, the complete stochastic model simulation results were used to analyze alternative scenarios and provide the results to decision makers in the form of probabilities, probability distributions, and for the SOV probabilistic forecasts. The main conclusion shown that this project is a profitable alternative investment in fruit trees in Chile.

Assessing investment value of privately-owned public rental housing projects with multiple options

Public rental housing (PRH) has been officially designed as the mainstream of China's affordable housing. However, very few private developers treat PRH as an ideal investment target on account that its investment value seems too low on the basis of traditional valuation method represented by the Net Present Value (NPV) method. Thus, disregarding for financial and operational issues of PRH projects, the normal role of a private developer in the supply of PRH is an agent which earns meager but stable agent fee. Consequently, the government has to bear a heavy financial and operational burden in PRH projects aiming to keep the sustainability of PRH projects. To improve this situation, a privately-owned PRH provision mode, Building-Own-Operation-Concession (BOOC) mode, is proposed, where the private developer is in charge of the life cycle management of PRH projects through a concession contract from the government, including the fund-raising, construction, operation and even demolition. Besides complying with all PRH relevant regulations, the private developer is entitled with multiple options to abandon, transfer and expand of targeted PRH project. Based on the NPV method and Real Option Pricing Model, a method for assessing the investment value of a PRH project in BOOC mode is proposed. Then, the proposed method is exemplified in a hypothetical privately-owned PRH project in Nanjing city of China. The proposed provision mode BOOC and valuation method are expected to show a new perspective for accelerating the sustainable development of PRH.

Consistent IRR and NPV rankings

Purpose – It is well known that internal rate of return (IRR) and net present value (NPV) rankings of mutually exclusive investments are sometimes inconsistent. This inconsistency, when it occurs, requires decision makers to choose between the two ranking methods. The purpose of this paper is to deduce sufficient conditions for consistent IRR and NPV investment rankings of mutually exclusive investments. Design/methodology/approach – Deductive reasoning is used to obtain the sufficient conditions required for consistent rankings of mutually exclusive investments. Findings – There are different sufficient conditions (methods) that can be used to resolve inconsistent IRR and NPV rankings. However, the different methods do not necessarily produce the same consistent rankings. In particular, different size adjustment methods and reinvestment rate assumptions can produce different IRR and NPV consistent rankings. This paper suggests the appropriate criteria for selecting a particular method for ranking mutually exclusive investments. Research limitations/implications – Like all deduced models, the results apply only to the set of assumptions and preconditions adopted in the model. Furthermore, the application is to ranking mutually exclusive investments. Practical implications – There is probably no other issue in the capital budgeting literature that has generated more attention and debate than the consistency (or lack thereof) between IRR and NPV rankings. This paper summarizes conditions that can be followed to resolve the conflict which should have near universal interest to those working in the capital budging area. This paper offers alternative methods for obtaining consistent IRR and NPV rankings which can be used to improve investment ranking decisions. The particular method used should depend on the decision environment. Guides for choosing the appropriate ranking method are described in the paper. Social implications – Significant decisions, projects, and investments are evaluated using either IRR or NPV methods. This paper shows that existing evaluation methods can lead to sub-optimal investment choices and provides an improved framework that facilitates better investment choices. Lacking an understanding of the sufficient conditions for IRR and NPV consistency – means that resource allocations have been made to investments and projects that are not optimal. Originality/value – To the best of the authors’ knowledge, the results are this paper have not been published nor are they available elsewhere. That said, this paper builds on important earlier work which is carefully cited and credited.

Using Composite Modeling as a Means to Maximize Profitability

Management Oil companies exist to make money. Many companies too often focus solely on maximizing current production when they should really be focusing on maximizing profitability. A holistic, total asset modeling process is needed to reorient the focus of digital oilfield systems to make the net present value (NPV) of every project the centerpiece of all decisions. Digital oil field providers have spent the past decade enabling a growing variety of specific workflows to automate isolated engineering tasks. These efforts have significantly reduced nonproductive time and costs. Nevertheless, transformational productivity increases will be required for operators to thrive in a prolonged, low oil price environment. For this reason, digital oil fields must become less about workflow orchestration and more about financial optimization. A variety of metrics are used in the industry to measure financial performance or to make capital budgeting decisions. In addition to NPV, the metrics may include internal rate of return (IRR), real options analysis, or payback period. Among these, payback fails to account for the time value of money, IRR does not return a unique solution in cases where positive and negative cash flows alternate over time, and real options analysis can be shown to be equivalent to the NPV method if risk is properly accounted for.* Less formalistic measurements may also come into play, particularly where projects involve national oil companies for whom politics, short-term cash flow pressures, and regulatory frameworks can exert large influences over the selection of a project. Without a significant loss of generality, we claim that if a business activity is not expected to increase NPV, then it should not be undertaken. Under this assumption, well-intentioned, but NPV-reducing, programs of activity that are proposed to improve a technical metric should be reconsidered. For example, reservoir engineers will always try to improve their recovery factors, but economic limits will dictate the scenarios in which oil should be left in the reservoir. In a company in which groups or teams are accustomed to operating in silos, the financial effect of decisions can be opaque, particularly at the level of decision making required to manage globally dispersed, cross- functional teams. To improve transparency, it is insufficient for only managers to have visibility into the financial effect of technical decisions. Technical personnel also need to know that their work is improving the bottom line. As they gain greater financial awareness, employees will begin making more improvements to their technical projects in ways that optimize profitability.

Nearly Zero Energy Building (NZEB) using IoT and Smart Grid

Current energy policy and climate mitigation goals require distinct reductions of the primary energy demand in the building sector. The existing building stock poses challenge since clear-cut technical and economical retrofit strategies for different types of existing buildings are still not established. The goal of the study is to identify such retrofit strategies to achieve optimal cost levels and to assess costs and benefits of nearly zero energy buildings (nZEB). Firstly building types are defined by covering single-family houses, multi-family houses, office buildings and school buildings. Secondly, a large set of generic energy efficiency measures are described, covering seven strategic fields, namely building envelope measures, heating and hot water supply technologies and fuel choice, ventilation and lighting systems, electricity and district heat mixes. This covers the usage of smart home appliances, eco-friendly building ventilation system. Thirdly, energy performance is calculated based on technical and physical characteristics and using building energy balance software. Fourthly, investment costs and life cycle costs are established based on unitary costs of building elements and building technologies. Cost-effectiveness is determined based on he net present value method which is compared to the annuity method for a couple of cases. The integration of smart grid and IoT(Internet of Things) is a new concept for conserving more.