224 Energy Project Financing: Resources and Strategies for Success
What value would you expect if we calculated the present worth
(equivalent value of all cash flows at t = 0) of Figure A-6? We must be
careful with the signs (directions) of the cash flows in this analysis since
some represent cash outflows (downward) and some represent cash in-
flows (upward).PW = – 5747.49 + 2000*(P|A,12%,5)*(P|F,12%,2)
PW = – 5747.49 + 2000*(3.6048)*(0.7972)
PW = – 5747.49 + 5747.49 = $0.00The value of zero for present worth indicates indifference regarding
this investment opportunity. We would just as soon do nothing (i.e., retain
our $5747.49) as invest in the opportunity.
What if the same returns (future cash inflows) were offered for a
$5000 investment (t = 0 outflow)? Would this be more, or less attractive?
Hopefully, after a little reflection, it is apparent that this would be a more
attractive investment, because you are getting the same returns but pay-
ing less than the indifference amount for them. What happens if we cal-
culate the present worth of this new opportunity?PW = – 5000 + 2000*(P|A,12%,5)*(P|F,12%,2)
PW = – 5000 + 2000*(3.6048)*(0.7972)
PW = – 5000.00 + 5747.49 = $747.49The positive value of present worth indicates an attractive invest-
ment. If we repeat the process with an initial cost greater than $5747.49,
it should come as no surprise that the present worth will be negative,
indicating an unattractive investment.
The concept of present worth as a measure of investment worth can
be generalized as follows:Measure of Worth: Present WorthDescription: All cash flows are converted to a single sum equivalent at
time zero using i = MARR.Calculation Approach: PW = At = 1Σ tP|F,i,t
n