Net Present Value Method Research Articles

Evaluation of the GNPV Method for Decision-making in Non-conventional Projects

Kulakova and Kulakov (2012) have presented the generalised net present value (GNPV) method to evaluate non-conventional projects. They have illustrated the method with three examples: a project of 2-year life with multiple internal rate of returns (IRRs), a project of 2-year life without IRR and a project of 3-year life with a unique real-valued IRR, which is not the rate of return. The purpose of the present study was to test the validity and feasibility of the GNPV method in evaluating other non-conventional projects with a longer life. The method was used to evaluate five scenarios: a project of 5-year life with multiple IRRs; a project of 7-year life with multiple IRRs, which were not the rates of return; a project of 10-year life with a positive and a negative IRR meaning the positive value was the unique IRR; a project of 7-year life with a salvage value and a unique IRR; and a staged expansion project of 10-year life with a unique IRR. It was concluded that the GNPV method worked in all the five cases considered. Advantages of the GNPV method were noticed in agreement with Kulakova and Kulakov (2012) that (i) the minimum attractive rate of return (MARR) was not required to find a solution; (ii) the internal (financing) rate may be different from the external (reinvestment) rate; and (iii) internal and external rates are not necessarily required for solution, but are required for evaluation of the projects. One disadvantage was observed that the computational work in some cases might be overwhelming.

Analysis of Individual Investment on Higher Education based on the Net Present Value Method

Analysis of Individual Investment on Higher Education based on the Net Present Value Method

Sensitivity analysis in determining the optimum energy for residential buildings in Polish conditions

The article applies the global costs calculation method with regard to the energy assessment of the selected solutions for the technical equipment of buildings, depending on the purpose and function of the building. The global costs were calculated by means of the net present value method in accordance with the cost-optimal draft regulation. In order to determine the sensitivity of the optimal ratio of primary energy to the adopted initial data, the total cost of the building, which is the sum of the investment and operating costs in the assumed operating period, was analyzed. The procedure takes into account the variability of the thermal envelope of the building, the ventilation requirements and the macroeconomic parameters. Primary energy includes all energy used for heating, ventilation, hot water and auxiliary energy and depends on the adopted macroeconomic parameters.In the region lacking economic stability, such as Eastern Europe, the sensitivity analysis is important for the process of establishing thermal requirements of the building and the energy supplied. In those countries, the economic changes will lead to changes in requirements over time.

Study on carbon capture and storage (CCS) investment decision-making based on real options for China's coal-fired power plants

In this paper, a quadrinomial model based on the theory of real options is developed to evaluate the investment in carbon capture and storage (CCS) retrofitting for existing coal-fired power plants in China. Uncertainties in carbon price, fossil fuel price, investment cost and government subsidy are considered. An existing typical 600 MW supercritical pulverized coal-fired (SCPC) plant is taken as a case study to illustrate the proposed model, and the effects of government subsidy under different scenarios on the critical carbon price to invest in CCS are analyzed. The results indicate that the real options approach has an advantage over the application of traditional net present value (NPV) method when handling uncertainty. And government subsidy has significant effects on reducing critical carbon price for investment in CCS. The critical carbon prices are 103.56 RMB/ton with 100% subsidy and 217.95 RMB/ton without subsidy, while the current average carbon price is 85.2 RMB/ton. This means that the current trading environment is not positive enough to attract investment in CCS retrofitting. These conclusions provide theoretical foundation for decision-making of CCS investment and related policy-making.

Optimal Unit Sizing of Biogas-Fuelled Micro Gas Turbine Cogeneration Systems in a Sewage Treatment Plant

This paper investigates the optimum size of Micro Gas Turbine Cogeneration Systems (MGT-CGSs) in a sewage treatment plant in relation to its economic performance. A sewage treatment plant in a cold region was adopted as a model, and three units of MGT-CGS with power output capacity of 30, 65 and 200kW were simulated to utilize biogas produced in-house in the plant. The energy balance of the system was first studied, and economic performance using Net Present Value method was carried out. It was found that a configuration with optimum combination of 3 types of MGTs (MGT-Combined) stated above had the highest power generation efficiency. However, MGT-Combinedneededmore units of MGT resulting in higher capital investment. Although all configurations of MGT-CGSs studied can generate Net Present Value (NPV) in the range of US$2,640,000-3,100,00, MGT-200had the highest NPV. MGT-200 had15% higher NPV compared to the lowest one,MGT-30. MGT-200 can generate the highest NPV because it had thelowest capital investment cost, while having high power cost savings.

Exergy and Economic Evaluation of a Commercially Available PV/T Collector for Different Climates in Iran

Thermal photovoltaic (PV/T) water based collectors are used to convert solar radiation to both thermal energy and electricity simultaneously. Along with energy analysis, exergy analysis is also useful for thermal systems such as PV/T to evaluate the “quality” of energy obtained from the system. Various types of PV/T collectors are available on the market. However, in this paper, a commercialized PV/T system is selected and exergy and economic analysis (exergoeconomics) is performed for a specific collector using known technical parameters and price for three cities in Iran with different insolation level. A MATLAB simulation program is prepared for this purpose, and it is cross validated using a former study on the same collector performed by TRNSYS and good agreement is observed. According to the results, exergy efficiency is obtained to be 9.7%, 9.6%, and 9.6% for the cities of Tabriz, Shiraz, and Esfahan respectively. An economic analysis is also performed using Net Present Value (NPV) method for the mentioned cities, and it concluded that with the specified economic parameters, the system is marginally economically feasible. This is found to be due to high capital investment costs as well as cheap available fossil fuel that is utilized widely in order to supply thermal and electrical energy demand in the studied cities.

Evaluation and selection of decision-making methods to assess landfill mining projects

For the first time in Austria, fundamental technological and economic studies on recovering secondary raw materials from large landfills have been carried out, based on the 'LAMIS - Landfill Mining Austria' pilot project. A main focus of the research - and the subject of this article - was to develop an assessment or decision-making procedure that allows landfill owners to thoroughly examine the feasibility of a landfill mining project in advance. Currently there are no standard procedures that would sufficiently cover all the multiple-criteria requirements. The basic structure of the multiple attribute decision making process was used to narrow down on selection, conceptual design and assessment of suitable procedures. Along with a breakdown into preliminary and main assessment, the entire foundation required was created, such as definitions of requirements to an assessment method, selection and accurate description of the various assessment criteria and classification of the target system for the present 'landfill mining' vs. 'retaining the landfill in after-care' decision-making problem. Based on these studies, cost-utility analysis and the analytical-hierarchy process were selected from the range of multiple attribute decision-making procedures and examined in detail. Overall, both methods have their pros and cons with regard to their use for assessing landfill mining projects. Merging these methods or connecting them with single-criteria decision-making methods (like the net present value method) may turn out to be reasonable and constitute an appropriate assessment method.

Cost analysis of a coal-fired power plant using the NPV method

The present study investigates the impact of various factors affecting coal-fired power plant economics of 210 MW subcritical unit situated in north India for electricity generation. In this paper, the cost data of various units of thermal power plant in terms of power output capacity have been fitted using power law with the help of the data collected from a literature search. To have a realistic estimate of primary components or equipment, it is necessary to include the latest cost of these components. The cost analysis of the plant was carried out on the basis of total capital investment, operating cost and revenue. The total capital investment includes the total direct plant cost and total indirect plant cost. Total direct plant cost involves the cost of equipment (i.e. boiler, steam turbine, condenser, generator and auxiliary equipment including condensate extraction pump, feed water pump, etc.) and other costs associated with piping, electrical, civil works, direct installation cost, auxiliary services, instrumentation and controls, and site preparation. The total indirect plant cost includes the cost of engineering and set-up. The net present value method was adopted for the present study. The work presented in this paper is an endeavour to study the influence of some of the important parameters on the lifetime costs of a coal-fired power plant. For this purpose, parametric study with and without escalation rates for a period of 35 years plant life was evaluated. The results predicted that plant life, interest rate and the escalation rate were observed to be very sensitive on plant economics in comparison to other factors under study.

Economic feasibility of pipe storage and underground reservoir storage options for power-to-gas load balancing

This paper investigates the economic feasibility of power-to-gas (P2G) systems and gas storage options for both hydrogen and renewable methane. The study is based on a techno-economic model in which the net present value (NPV) method and Monte Carlo simulation of risks and price forward curves for the electricity and the gas market are used. We study three investment cases: a Base Case where the gas is directly sold in the market, a Storage & Arbitrage Case where temporal arbitrage opportunities between the electricity and the gas market are exploited, and a Storage & Balancing Case where the balancing markets (secondary reserve market for electricity, external balancing market for natural gas) are addressed. The optimal type and size of different centralized and decentralized storage facilities are determined and compared with each other. In a detailed sensitivity and cost analysis, we identify the key factors which could potentially improve the economic viability of the technological concepts assessed. We find that the P2G system used for bridging the balancing markets for power and gas cannot be operated profitably. For both, temporal arbitrage and balancing energy, pipe storage is preferred. Relatively high feed-in tariffs (100€MW−1 for hydrogen, 130€MW−1 for methane) are required to render pipe storage for P2G economically viable.

Sustainability Assessment of a Self-Consumption Wood-Energy Chain on Small Scale for Heat Generation in Central Italy

The sustainability of a small-scale self-consumption wood-energy chain for heat generation in central Italy was analyzed from a technical, economic and energetic point of view. A micro-chain was developed within the CRA-ING farm at Monterotondo (Rome, Italy): The purpose of this system was to produce biomass for supplying a heating plant within the CRA-ING property as a substitute for diesel fuel. A poplar short rotation coppice, established with clones AF2, AF6 and Monviso, fed the micro-chain. The rotation was biennial. The average plantation production (Mgd.m.·ha−1·year−1) was 10.2, with a maximum of 13.53 for the twin-rows AF2 and a minimum of 8.00 for the single-row Monviso. The economic assessment was based on the Net Present Value (NPV) method and the equivalent annuity cost, and found an average saving of 15.60 €·GJ−1 of heat generated by the wood chips heating system in comparison with the diesel heating system over a 10 year lifetime of the thermal power plant. The energy assessment of the poplar plantation, carried out using the Gross Energy Requirements method, reported an energy output/input ratio of 12.3. The energy output/input ratio of the whole micro-chain was 4.5.

The real option approach to adoption or discontinuation of a management accounting innovation: the case of activity-based costing

This paper employs the real option approach (ROA) to study the investment decision of a management accounting innovation—the case of activity-based costing (ABC)—adoption or discontinuation under uncertainty. We argue that investing in ABC is analogous to having the option rights in a financial (American) call option. We propose a model taking the firm’s total annual production as primary decision variable and using the added annual net profits after establishing ABC to identify the optimal threshold for adoption or discontinuation. We find that the optimal adoption (resp., discontinuation) threshold is higher (resp., lower) when obtained by the ROA than by the net present value (NPV) method; thus, the ROA is more conservative than the NPV approach. Their difference stems mainly from the ROA’s option value of delay before implementing the adoption/discontinuation decision. Further, recent empirical researches based on survey found inconclusive results about the adoption of ABC. For instance, there are studies found that manufacturing sector having a higher adoption rate of ABC than non-manufacturing sector, but the other studies find the opposite. Our theoretical model explains the inconclusive results from the empirical researches can be driven by the variations in mean and volatility of sectoral output growth, which are omitted in those studies.

Thermo-economic analysis and sizing of a PV plant equipped with a compressed air energy storage system

Photovoltaic (PV) farms are widely used around the world to provide required electricity. Compressed air energy storage (CAES) system has been already proposed for energy storage applications in large scales. In this work, employing a CAES unit equipped with an ancillary solar heating system for a large scale PV farm in Brazil is proposed. A PV farm with 100 MWp (megawatt peak) capacity is proposed to be built in the most suitable point within Brazil. The sizing of the CAES unit and the solar heating system, which has not been investigated, along with selecting the best power sales strategy for the power plant, which has been always a challenge for renewable energy source power plants, are carried out emphasizing energy-economic considerations. In order to prove the proficiency of the proposal, the performance of the power plant and energy storage unit is assessed over a sample year. In order to have a comprehensive economic analysis, Net Present Value (NPV) method is employed and all the possible uncertainties in the system have been taken into account.

Organic Rankine cycle saves energy and reduces gas emissions for cement production

We investigated ORCs (organic Rankine cycles) integrated with typical China cement production line. The dry air at the kiln cooler outlet with the temperature of 220 °C was the waste heat. The fluids of hexane, isohexane, R601, R123 and R245fa were selected for ORCs based on the critical temperature criterion. The developed ORC verified the thermodynamics analysis. The NPV (net present value) and PBP (payback period) methods were applied to evaluate the economic performance. The LCA (life cycle assessment) was applied to evaluate the environment impacts. ORCs could generate 67,85,540–81,21,650 kWh electricity per year, equivalent to save 2035–2436 tons standard coal and reduce 7743–9268 tons CO2 emission, for a 4000 t/d cement production line. ORCs reduced gas emissions of CO2 by 0.62–0.74%, SO2 by 3.83–4.59% and NOx by 1.36–1.63%. The PBP (payback period) was 2.74–3.42 years. The ORCs had the reduction ratios of EIL (environment impact load) by 1.49–1.83%, GWP (global warming potential) by 0.74–0.92%, AP (acidification potential) by 2.34–2.84%, EP (eutrophication potential) by 0.96–1.22% and HTP (human toxicity potential) by 2.38–2.89%. The ORC with R601 as the fluid had the best economic performance and significant gas emission reductions. ORCs had good economic performance and reduce the gas emissions.

The Internet of Things (IoT): Applications, investments, and challenges for enterprises

The Internet of Things (IoT), also called the Internet of Everything or the Industrial Internet, is a new technology paradigm envisioned as a global network of machines and devices capable of interacting with each other. The IoT is recognized as one of the most important areas of future technology and is gaining vast attention from a wide range of industries. This article presents five IoT technologies that are essential in the deployment of successful IoT-based products and services and discusses three IoT categories for enterprise applications used to enhance customer value. In addition, it examines the net present value method and the real option approach widely used in the justification of technology projects and illustrates how the real option approach can be applied for IoT investment. Finally, this article discusses five technical and managerial challenges.

Expanded Net Present Value for Various Mining Valuation

The purpose of this paper to provide a valuation incorporating management flexibility in an uncertain operating environment for valuing various mining in Indonesia. This research raises the question on what strategies in developing valuations models of various mining and how uncertainty such as prices, grades/quality, costs, schedules, quantities, environmental issues and among others which are not known at the beginning of the project, have contributed to the value resulted. The study is based on an Expanded Net Present Value (eNPV) valuation in which uncertainty and management flexibility are incorporated into the valuation. The focus of the research is on the strategy in determining value using Expanded Net Present Value (eNPV) and on how to mitigate the risks of uncertainties. The paper emphasizes the specific characteristics of the actual mining valuation in Indonesia, generated by conventional NPV method commonly used. This was also confirmed in a study carried out by Graham and Campbell (2002), of 392 completed CFO surveys, 74.9% of respondents always or mostly use the Net Present Value (NPV) method of project valuation. However, conventional valuation tools have penalized projects with a high degree of uncertainty and lead to myopic decisions. The research is correlated to diagnose the flexibility of strategic mine planning and to analyze the process of change within the uncertainties. The study allows emphasis on some characteristics of the mining valuation process developed in Indonesia.

A new design for natural gas pressure reduction points by employing a turbo expander and a solar heating set

Natural gas pressure reduction station (CGS) is one of the most important pieces in natural gas transmission system. In a CGS, the high inlet natural gas (NG) pressure has to be reduced down to a much lower value. Pressure reduction is usually implemented by utilizing throttling valves. Due to the positive Joule–Thompson coefficient of NG, this pressure drop causes significant temperature fall and consequently hydrate forming in the NG stream. The hydrates may prevent stable NG flow through the pipeline. To prevent hydrate forming, the NG should be preheated by some heaters which burn huge amount of fuel. In this work, firstly, adding a solar heating system aiming to reduce the heater fuel consumption and secondly, replacing the throttling valve by a turbo expander in order to utilize the NG stream exergy are proposed. The proposed configuration is simulated for Birjand CGS as a case study. For the simulation, the locally available solar irradiation is estimated by employing solar engineering formulations and the NG availability is calculated by thermodynamics correlations. Net present value (NPV) method is also employed to analyze the proposed system effectiveness economically, resulting to only 3.5 years of pay back ratio.

Energy and economic analysis of the carbon dioxide capture installation with the use of monoethanolamine and ammonia

AbstractIn the study an accurate energy and economic analysis of the carbon capture installation was carried out. Chemical absorption with the use of monoethanolamine (MEA) and ammonia was adopted as the technology of carbon dioxide (CO2) capture from flue gases. The energy analysis was performed using a commercial software package to analyze the chemical processes. In the case of MEA, the demand for regeneration heat was about 3.5 MJ/kg of CO2, whereas for ammonia it totalled 2 MJ/kg CO2. The economic analysis was based on the net present value (NPV) method. The limit price for CO2emissions allowances at which the investment project becomes profitable (NPV = 0) was more than 160 PLN/Mg for MEA and less than 150 PLN/Mg for ammonia. A sensitivity analysis was also carried out to determine the limit price of CO2emissions allowances depending on electricity generation costs at different values of investment expenditures.

Technological Innovation, Product Life Cycle and Market Power: A Real Options Approach

This paper employs a real options approach to analyze optimal investment decisions. When investment projects have the characteristics of irreversibility, uncertainty and the option to wait or exit, the traditional net present value (NPV) method would underestimate the value of investment, since it neglects the values of timing and operational flexibility. The distinctive feature of this paper is that the effects of product life cycle (PLC) as well as market power are incorporated into the model. In addition, and different to the approach in Liao et al. [Optimal investment decision and product life cycle: A real options approach, Sun Yat-Sen Management Review 11(3) (2003) 1–36], we introduce the concept of technological innovation into the model. It is shown that the optimal waiting time for the investment is longer than both those in the American call options model of McDonald and Siegel [The value of waiting to invest, Quarterly Journal of Economics 101(4) (1986) 707–727], which does not incorporate dividend yield, and Liao et al. [Optimal investment decision and product life cycle: A real options approach, Sun Yat-Sen Management Review 11(3) (2003) 1–36], but is shorter than that in Dixit and Pindyck's [Investment under Uncertainty (Princeton University Press, Princeton, NJ, 1994)] model, which incorporates dividend yield. Finally, a comparative static is used to analyze the determinants of optimal investment decisions. Our results indicate that the investment-ratio threshold will be higher, and thus the optimal entry time for an investment will be delayed, when (1) the PLC is longer, (2) the uncertainty is greater, (3) the discounting rate is higher, (4) market power is larger, (5) jump size intensity is stronger and (6) the payoff out ratio (R&D/revenue) is larger.

A Simulation Approach to Evaluate Operational Economics of Wind Power Investments in Turkey

 Abstract—It is crucial to analyze the wind distribution throughout the year and the expected annual power generation (Mwh) to evaluate a wind power investment. The cut-in and cut-out wind speeds along with the size of the wind turbine should carefully be included to the analysis as they will affect the amount of power generation. On the other hand, the capital cost and cost of power generation each year should be allocated to the economic life of the project using an appropriated discount rate. In this paper, an economic analysis method and a wind simulation approach is developed to evaluate the expected annual power generation of a wind project. The revenue is calculated using expected power amount and the power price ($/Mwh) and the net return is found by subtracting the cost. The necessary economic analysis is then performed using net present value and payback method. The weibull distribution is assumed for the wind and operational characteristics of the turbine are included.

Real Option-based Evaluation of Eco-oriented Investment Using the Example of Closed-loop Supply Chains

Natural resources should be used as effectively as possible along the entire supply chain. One approach to keep the resources on a high value-added level is the extension of classical supply chains to closed-loop supply chains, covering the whole product life cycle. This requires innovations in products and technologies as well as changes in existing value-added processes. Thus, the required redesign process comes along with extensive investment and a high level of uncertainty and flexibility and can have a significant impact on the success of the company.This paper presents a model, based on the real options theory with a closed-loop supply chain which complements the classic investment approach with ecological aspects of the evaluation. The model allows a qualitative and quantitative assessment of investment decisions associated with uncertainty. Additionally, the possible options for action and the inherent risks are demonstrated. The expansion of the net present value method to real options with external environmental factors and entrepreneurial aspects of design enable in this case the calculation of an extended net present value for realistic evaluation of strategic investments.