196 Energy Project Financing: Resources and Strategies for Success
A.2 INTRODUCTIONCapital investment decisions arise in many circumstances. The cir-
cumstances range from evaluating business opportunities to personal
retirement planning. Regardless of circumstances, the basic criterion for
evaluating any investment decision is that the revenues (savings) gen-
erated by the investment must be greater than the costs incurred. The
number of years over which the revenues accumulate and the compara-
tive importance of future dollars (revenues or costs) relative to present
dollars are important factors in making sound investment decisions. This
consideration of costs over the entire life cycle of the investment gives rise
to the name “life cycle cost analysis,” which is commonly used to refer to
the economic analysis approach presented in this appendix. An example
of the importance of life cycle costs is shown in Figure A-1, which depicts
the estimated costs of owning and operating an oil-fired furnace to heat a
2,000-square-foot house in the northeast United States. Of particular note
is that the initial costs represent only 23% of the total costs incurred over
the life of the furnace. The life cycle cost approach provides a significantly
better evaluation of long-term implications of an investment than meth-
ods which focus on first cost or near-term results.Figure A-1. 15-year life cycle costs of a heating systemLife cycle cost analysis methods can be applied to virtually any pub-
lic or private business sector investment decision as well as to personal
financial planning decisions. Energy related decisions, provide excellent
examples for the application of this approach. Such decisions include:
evaluation of alternative building designs that have different initial costs,
operating and maintenance costs, and perhaps different lives; evaluation
of investments to improve the thermal performance of an existing build-
ing (wall or roof insulation, window glazing); and evaluation of alterna-