238 Energy Project Financing: Resources and Strategies for Success
one, and only one, will be selected as the best (optimal) decision. The
set of decision alternatives developed in this way has the properties of
being collectively exhaustive (all possible choices are listed) and mutu-
ally exclusive (only one will be selected).
The next step in the process is to eliminate decisions from the
collectively exhaustive, mutually exclusive set that represent choices
which would violate one (or more) of the constraints on the projects.
For the projects of Figure A-9, assume the following two constraints
exist:Project B is contingent on Project C, andA budget limit of $1500 exists on capital expenditures at t = 0.Based on these constraints the following decision alternatives
must be removed from the collectively exhaustive, mutually exclusive
set: any combination that includes B but not C (B only, A&B, B&D,
A&B&D), any combination not already eliminated whose t = 0 costs
exceed $1500 (B&C, A&B&C, A&C&D, B&C&D, A&B&C&D). Thus,
from the original set of 16 possible decision alternatives, 9 have been
eliminated and need not be evaluated. These results are illustrated in
Table A-8. It is frequently the case in practice that a significant percent-
age of the original collectively exhaustive, mutually exclusive set will
be eliminated before measures of worth are calculated.
The next step is to create the cash flow series for the remaining
(feasible) decision alternatives. This is a straight forward process and is
accomplished by setting a decision alternative’s annual cash flow equal
to the sum of the annual cash flows (on a year by year basis) of all
projects contained in the decision alternative. Table A-9 illustrates the
results of this process for the feasible decision alternatives from Table
A-8.
The next step is to calculate a measure of worth for each decision
alternative. Any of the four consistent measures of worth presented
previously (PW, AW, IRR, or SIR but NOT PBP) can be used. The mea-
sures are entirely consistent and will lead to the same decision alterna-
tive being selected. For illustrative purposes, PW will be calculated for
the decision alternatives of Table A-9 assuming MARR = 12%.