Energy Project Financing : Resources and Strategies for Success

252 Energy Project Financing: Resources and Strategies for Success

Example 29

Using the cash flows of Examples 27 and interest rates of Example 28,

determine the present worth of the grocery purchases using a constant

worth analysis.

Constant worth analysis requires constant worth cash flows and the

real value of MARR.

PW = 1000 * (P|A,15%,4)

= 1000 * (2.8550) = $2855.00

Example 30

Using the cash flows of Examples 27 and interest rates of Example 28,

determine the present worth of the grocery purchases using a then cur-

rent analysis.

Then current analysis requires then current cash flows and the com-

bined value of MARR.

PW = 1030.00 * (P|F,18.45%,1) + 1060.90 * (P|F,18.45%,2) + 1092.73

* (P|F,18.45%,3) +1125.51 * (P|F,18.45%,4)

PW = 1030.00 * (0.8442) + 1060.90 * (0.7127) + 1092.73 * (0.6017)

+1125.51 * (0.5080)

PW = 869.53 + 756.10 + 657.50 + 571.76 = 2854.89

The notable result of Examples 29 and 30 is that the present worths

determined by the constant-worth approach ($2855.00) and the then-cur-

rent approach ($2854.89) are equal. (The $0.11 difference is due to round-

ing.) This result is often unexpected but is mathematically sound. The

important conclusion is that if care is taken to appropriately match the

cash flows and value of MARR, the level of general price inflation is not a

determining factor in the acceptability of projects. To make this important

result hold, inflation must either (1) be included in both the cash flows,

and MARR (the then-current approach) or (2) be included in neither the

cash flows nor MARR (the constant-worth approach).

A.9.5 Sensitivity Analysis and Risk Analysis

Often times the certainty assumptions associated with deterministic

analysis are questionable. These certainty assumptions include certain