Page 173 - Sustainable On-Site CHP Systems Design, Construction, and Operations

146 T h e Fe a s i b i l i t y S t u d y

Time Period Payments ($) Present Worth ($)
End of year 1 10,000 9,523.81
End of year 2 10,000 9,070.29
End of year 3 10,000 8,638.38
End of year 4 10,000 8,277.02
End of year 5 10,000 7,835.26
Total 50,000 43,344.76
TABLE 9-2 Present Worth Example (at 5 Percent Discount Rate)

In example, present in Table 9-2, the net present value would be expressed as
NPV = ($9,523.81 + $9,070.29 + $8,638.38 + $8,277.02 + $7,835.26) = $43,294.77
So while the sum of the cash flow is $50,000, the NPV is $43,345, and given a 5 percent
rate of return, $43,345 today is equivalent to receiving $10,000 per year for the next 5 years.

Escalation Rates
Escalation rates are that rates at which the costs of goods or services increase. Escalation
rates that are typically considered in an LCC analysis are those of energy (purchased
electricity and fuel), labor (operations and maintenance labor, as well as administrative
labor costs), permitting costs, and parts and general goods costs. Escalation rates vary
from country to country, by region, by industry, by labor source, and most importantly
over time. The appropriate escalation rates this year may be much different from a decade
ago or from 10 years from now.

Length of Analysis
The length of the LCC analysis is an important consideration. A typical analysis length
is approximately 20 years, though it will vary from project to project. Different portions
of the project investment will have different useful service lives, and therefore the useful
service life of the assembled project is difficult to estimate and use as a basis for the
length of analysis. For example, the plant building may have a 50-year life, the prime
mover a 20-year life, and the piping a 30-year life. The further into the future the analysis
looks, the harder it is to predict analysis variables such as interest rates, discount rates,
and escalation rates and the confidence level in the analysis is therefore weakened.
Project investors may also have a standard analysis length that is used for all analyses,
or a specified time period in which they need to realize savings.

Salvage Value
Salvage value is the value of the equipment, building, etc. at the end of its useful service
life. Whether or not salvage value is considered is primarily dependent on the length of
the analysis, as discussed in the above paragraph. The salvage value of any equipment
that reaches the end of its useful service life and is replaced during the analysis period
should be considered in the cash flow of the economic analysis. The actual effective
amount of the salvage value and its significance to the overall analysis is affected by
many factors, such as whether the equipment was fully depreciated at the point that it