Techno-Economic Analysis University of Aveiro

Techno-Economic Analysis
of
Engineering Projects
(basic elements)
Manuel de Oliveira Duarte

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

About the nature of Engineering Projects (1)

• An engineering project is a set of planned activities targeted at

solving problems, answering needs or exploiting opportunities and,
therefore, having the purpose of generating benefits during a certain
period of time.

 Planning of engineering projects involves two fundamental alpects:

 Time spent in the implementation of the project.
 Costs associated with the mobilised resources .

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

About the nature of Engineering Projects (2)

Phases of an engineering project

 Identification of an idea, a need or an opportunity
Concept Phase

 Analysis of the problems to be solved (objectives, requirements and constraints)

 Planning of concept phase

 Identification of possible solutions and scenarios

 Prototyping of possible solutions

 Evaluation of technical and economic feasibility of possible solutions

 Decisions about technical solutions and economic scenarios

 Planning of development and deployment phase

 Development
Deployment Phase
Development and

 Testing and validation (in laboratory, factory, field, etc)

 Production of documentation

 Promotion and comercialization

 Deployment (installation, operation and provision of maintenance support)

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

About the nature of Engineering Projects (3)

• Engineering projects require resources of different nature:

 Human resources.
 Equipment (e.g.: machinery, tools, furniture, etc).
 Software (bought with certain usage rigths).
 Buildings or other real estate (e.g.: land to grow crops for an agricultural
enterprise).
 Consumables (e.g.: office materials, fuel bought to heat a boiler and
other goods that might be spent or wasted).
 Services contracted to third parties such as energy and communications
provision, cleaning, maintenance, etc).
 Licences and other rights (patents, authorship rights, etc).

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

Techno-Economic Analysis of Engineering Projects (1)

• Before going ahead with a project it is necessary to assess its economic

feasibility. This is done trough a techno-economic analysis.

• The techno-economic evaluation of a project involves the following steps:

• Identification of the possible technical solutions for the problem, need
or opportunity under consideration.
• Quantification of the financial scenarios associated with the identified
technical solutions.

Several financial indicators might be used for this quantification. The

following will be considered :
 Net Present Value
 Internal Rate of Return
 Payback Period

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

Techno-Economic Analysis of Engineering Projects (2)

• In addition to the technical and financial aspects, sometimes it is also

necessary to pay attention to issues of other nature such as social,
regulatory, echological, etc issues.

• Normally a project involves risks and uncertainty.

• To deal with risks it is commom to elaborate contingency plans specifying

what shoud be done in case of the materialization of the identified risks.

• To deal with uncertainty is is commomm to build scenarios representing the

range of possible working conditions (“What If” Analysis).

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

Techno-Economic Analysis of Engineering Projects (3)

Difficult questions appear:

 Who are our clients?

 How many are they?
 How long will it take for them to buy our product/service?
 Where are they?
 How can we reach them?
 Via physical stores?
 Via the web?
 How much are they willing to pay?
 How much is it necessary to invest and over how long?
 Are we going to face competition?
 Are there any regulations that must be obeyed to sell our
product/service?

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

Techno-Economic Analysis of Engineering Projects (4)

Unfortunately, engineers do not have a crystal ball to guess how markets will
behave in relation to the appearence of a new technology, service or product.

https://www.cartoonstock.com/directory/c/crystal_ball_reade
rs.asp
Manuel de Oliveira Duarte, [email protected]
Techno-Economic Analysis University of Aveiro

Techno-Economic Analysis of Engineering Projects (5)

(1)
But… it is also possible to learn with the past:

Source: https://www.cartoonstock.com/directory/c/cassandra.asp, seen at: 20200317.

Manuel de Oliveira Duarte, [email protected]
Techno-Economic Analysis University of Aveiro

Techno-Economic Analysis of Engineering Projects (6)

(1)
… looking at trends of how markets reacted to new products, services and technologies:

Source: L. K. Vanston, R.L. Hodges, “Technology forecasting for telecommunications”, Telektronikk 4.04, pp. 32-42, 2004.
Manuel de Oliveira Duarte, [email protected]
Techno-Economic Analysis University of Aveiro

Techno-Economic Analysis of Engineering Projects (7)

Trends from the past (2)

http://www.alkane.com.au/exponential-growth-of-electric-vehicles-make-rare-earths-
extremely-valuable/

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

Techno-Economic Analysis of Engineering Projects (8)

It is case to ask:
“What can explain that products, services and technologies as diverse as those to
which the previous figures relate have so similar patterns of adoption?”

To help address this issue consider the companion document:

Modelos Matemáticos para os Processos de Adopção de Tecnologias, Produtos e Serviços:
Breve Introdução
A.Manuel de Oliveira Duarte, Universidade de Aveiro, 2020

The above reference provides the following model for the patterns of
adoption of new products, services and technologies:

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

Techno-Economic Analysis of Engineering Projects (9)

𝑃𝑃𝑓𝑓 − 𝑃𝑃𝑖𝑖
𝑃𝑃 𝑡𝑡 = 𝑃𝑃𝑖𝑖 +
1 + 𝛼𝛼 � 𝑒𝑒𝛽𝛽�𝑡𝑡
Where:

𝑃𝑃 𝑡𝑡 = 𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝒕𝒕

𝑃𝑃𝑖𝑖 = 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑢𝑢𝑢𝑢𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 , 𝑡𝑡 = 0
𝑃𝑃𝑓𝑓 = 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑜𝑜𝑜𝑜 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
𝛽𝛽: 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑠𝑠 ℎ𝑜𝑜𝑜𝑜 𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞 𝑜𝑜𝑜𝑜 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑡𝑡𝑡𝑡𝑡 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑖𝑖𝑖𝑖 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜: 𝑃𝑃

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

Techno-Economic Analysis of Engineering Projects (10)

Unfortunately, sometimes a certain vírus appears and…

Source: https://www.hawaiipublicradio.org/post/conversation-hawaii-economic-forecast-down-due-covid-
19#stream/0, seen: 20200317.
Manuel de Oliveira Duarte, [email protected]
Techno-Economic Analysis University of Aveiro

Essential Elements
of
Project Economics

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

Essential Elements of Project Economics (1)

The economics of an engineering project involves some essential
elements:
 Time:
 Every project as a time to start and a time to end.
 This implies the need for planning the expected flows of spending and
revenues over time, as a function of expected activities.
 Capital expenditure (CAPEX)
 This relates to all spending in capital goods
(e.g.: buildings, durable equipment, basic infrastructures such as ducts and cables,
tradable patents, etc).
 Operational expenditure (OPEX)
 This relates to all spending in the aquisition of consumables and services
(e.g.: labour, communications, energy, etc).
 Revenues:
 This relates to all possible incomes that might be generated by the project
(sales, royalties, etc).

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

Essential Elements of Project Economics (2)

Two additional concepts of project economics are the following:

 Cashflow:
CashFlow in year j is defined as the sum of all revenues in year j,
𝑅𝑅𝑗𝑗 , subtracted by the sum of all expenses in the same year j, 𝐸𝐸𝑗𝑗 :
𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝒋𝒋 = 𝑪𝑪𝑪𝑪𝒋𝒋 = ∑ 𝑹𝑹𝒋𝒋 -∑ 𝑬𝑬𝒋𝒋

 CashBalance
CashBalance in year k can be defined as the accumulated sum of
CashFlows up to year k:
𝑲𝑲

𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝒌𝒌 = � 𝑪𝑪𝑪𝑪𝒋𝒋
𝒋𝒋=𝟎𝟎

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

Simple Example (1)

Consider the following simple example:

An hypothetical project generates expenses and revenues over a

period of 10 years as shown in the following scennario, where the
corresponding yearly CashFlows and CashBalances have been
calculated:

Time=> 0 1 2 3 4 5 6 7 8 9 10
Capital Expenditure (CAPEX) 2 000 000 €
Operational Expenditure (OPEX) 24 000 € 36 000 61 200 122 400 244 800 440 640 749 088 1 198 541 1 797 811 2 516 936 3 272 016
Revenues 0€ 48 000 192 000 576 000 1 152 000 1 728 000 2 073 600 2 488 320 2 737 152 3 010 867 3 311 954
Cash Flow -2 024 000 € 12 000 130 800 453 600 907 200 1 287 360 1 324 512 1 289 779 939 341 493 932 39 938
Accumulated CashFlow=CashBalance -2 024 000 € -2 012 000 -1 881 200 -1 427 600 -520 400 766 960 2 091 472 3 381 251 4 320 592 4 814 524 4 854 461

Note:
The above table comes from the companion Worksheet:
“Simple_Financial_Analysis_MOD_20191028.xlsx”

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

Simple Example (3)

In graphical terms:

Note:
The above table/graph comes from the companion Worksheet:
“Simple_Financial_Analysis_MOD_20191028.xlsx”

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

Simple Example (4)

However, the above calculations and graphics have “forgotten”

an importante mechanism: the effects of time over the flows of
money.

As presented above, flows of money in diferente years have been

treated as if they had occurred all at the same time.

This is NOT CORRECT…

In fact, if we assume a (positive) flow of cash today, it can be

invested still today and begin generating returns immediately
making it more valuable than a flow of the same nominal value
that only occurs in the future, since between the present moment
and the moment of its occurrence, it does not generate any
returns.
Manuel de Oliveira Duarte, [email protected]
Techno-Economic Analysis University of Aveiro

Money Time Vale (1):

 Under a financial perspective, the value of money is not constant
over time, being affected by several factors, namely interest rate, 𝒕𝒕𝒋𝒋
and inflation rate, 𝒕𝒕𝒊𝒊 .
 Considering that at 𝒕𝒕 = 𝟎𝟎 available capital is 𝐶𝐶(0), then, at 𝒕𝒕 = 𝟏𝟏:
 Interest rate effect:
 𝐶𝐶 1 = 𝐶𝐶 0 . 1 + 𝑇𝑇𝑗𝑗 => increase in value
 Inflation effect::
𝐶𝐶 0
 𝐶𝐶 1 = 1+𝑇𝑇𝑖𝑖
=> decrease in value
 Considering now the combined effects of interest and inflation:
1+𝑇𝑇𝑗𝑗 𝑇𝑇𝑗𝑗 −𝑇𝑇𝑖𝑖
 𝐶𝐶 1 = 𝐶𝐶 0 . = 𝐶𝐶 0 . (1 + ) ≈ 𝐶𝐶 0 . 1 + (𝑇𝑇𝑗𝑗 −𝑇𝑇𝑖𝑖 )
1+𝑇𝑇𝑖𝑖 1+𝑇𝑇𝑖𝑖

 Defining 𝑇𝑇𝑗𝑗 −𝑇𝑇𝑖𝑖 = 𝑇𝑇𝑎𝑎 as discount rate (or actualization rate) then:

𝐶𝐶 1 = 𝐶𝐶 0 . 1 + 𝑇𝑇𝑎𝑎
and
𝑘𝑘
𝐶𝐶 𝑘𝑘 = 𝐶𝐶 0 . 1 + 𝑇𝑇𝑎𝑎

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

Money Time Vale (2):

 Then, the Net Future Value (NFV) of capital 𝐶𝐶(0), if subject to an

actualization rate 𝑇𝑇𝑎𝑎 , will be given by the following formulas:

𝑡𝑡
𝑡𝑡 = 0 𝑡𝑡 = 1 𝑡𝑡 = 2 𝑡𝑡 = 𝐾𝐾
2
𝐶𝐶(0) C(1)=𝐶𝐶 0 . 1 + 𝑇𝑇𝑎𝑎 C(2)=𝐶𝐶 0 . 1 + 𝑇𝑇𝑎𝑎 𝐶𝐶 𝑘𝑘 = 𝐶𝐶 0 . 1 + 𝑇𝑇𝑎𝑎 𝑘𝑘

𝑘𝑘
𝐶𝐶 𝑘𝑘 = 𝐶𝐶 0 . 1 + 𝑇𝑇𝑎𝑎 = Net Future Value of C(0) at time K

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

Money Time Vale (3):

 Inversely, assuming that at 𝒕𝒕 = 𝑲𝑲, available capital is 𝐶𝐶(k), then its

Net Present Value (NPV) value can be calculated as follows:

𝑡𝑡
𝑡𝑡 = 0 𝑡𝑡 = 1 𝑡𝑡 = 𝑘𝑘 − 1 𝑡𝑡 = 𝐾𝐾
𝐶𝐶 𝐾𝐾 𝐶𝐶 𝐾𝐾 𝐶𝐶 𝐾𝐾
𝐶𝐶 0 = 𝐶𝐶 1 = 𝐶𝐶 𝑘𝑘 − 1 = 𝐶𝐶 𝑘𝑘
(1 + 𝑇𝑇𝑎𝑎 )𝑘𝑘 (1 + 𝑇𝑇𝑎𝑎 )𝑘𝑘−1 (1 + 𝑇𝑇𝑎𝑎 )

𝐶𝐶 𝐾𝐾
 𝐶𝐶 0 = = Net Present Value of C(k) at time 0.
(1+𝑇𝑇𝑎𝑎 )𝑘𝑘

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

Money Time Vale (4):

If we have a series of financial flows in different instants of time, 𝐹𝐹𝑖𝑖 = 𝑅𝑅𝑖𝑖 − 𝐸𝐸𝑖𝑖 ,
where 𝑅𝑅𝑖𝑖 and 𝐸𝐸𝑖𝑖 are, respectively, revenues and expenses at time i, …

0 1 2 3 𝑘𝑘
F 0 F 1 F 2 F 3 … F 𝑘𝑘

…then, the Net Present Value of these flows refered to t=0 is:

𝑘𝑘 𝑘𝑘
𝐹𝐹𝑖𝑖 𝑅𝑅𝑖𝑖 − 𝐸𝐸𝑖𝑖
𝑁𝑁𝑁𝑁𝑁𝑁[F 𝑖𝑖 , 𝑖𝑖 = 1 … 𝑘𝑘 ] = � =�
(1 + 𝑟𝑟𝑎𝑎 )𝑘𝑘 (1 + 𝑟𝑟𝑎𝑎 )𝑘𝑘
𝑖𝑖=0 𝑖𝑖=0

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

Engineering Projects Profitability Metrics (1)

• Net Present Value (NPV):

One of the most common profitability metrics for engineering
projects has already been introduced: Net Present Value (NPV).
𝑘𝑘 𝑘𝑘
𝐹𝐹𝑖𝑖 𝑅𝑅𝑖𝑖 − 𝐸𝐸𝑖𝑖
𝑁𝑁𝑁𝑁𝑁𝑁[F 𝑖𝑖 , 𝑖𝑖 = 1 … 𝑘𝑘] = � = �
(1 + 𝑟𝑟𝑎𝑎 )𝑘𝑘 (1 + 𝑟𝑟𝑎𝑎 )𝑘𝑘
𝑖𝑖=0 𝑖𝑖=0
where 𝑅𝑅𝑖𝑖 and 𝐸𝐸𝑖𝑖 are, respectively, revenues and expenses at time i
NPV corresponds to the accumulated sum of all CashFlows, each one of
them referred to time 𝒕𝒕 = 𝟎𝟎 (or, in an alternative way of saying,
“discounted to 𝒕𝒕 = 𝟎𝟎”). NPV is, therefore, the same as the final value of
the project CashBalance.

Two other common profitability metrics for engineering projects to be

addressed in these slides are:
• Internal Rate of Return (IIR)
• Payback Period (PBP)

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

Engineering Projects Profitability Metrics (2)

• Internal Rate of Return (IRR):

The IIR of a project is the value that the actualization rate 𝑇𝑇𝑎𝑎 (the
joint effect of interest rate and inflation) should have to make
the net present value (NPV) of the project equal to zero:
𝑘𝑘
𝐹𝐹𝑖𝑖
𝐼𝐼𝐼𝐼𝐼𝐼: 𝑁𝑁𝑁𝑁𝑁𝑁[𝐹𝐹𝑖𝑖 |𝑇𝑇𝑎𝑎 = 𝐼𝐼𝐼𝐼𝐼𝐼] = � =0
(1 + 𝐼𝐼𝐼𝐼𝐼𝐼)𝑖𝑖
𝑖𝑖=1
When analyzing if a certain project should go ahead or not, IRR
indicates the rate of return that will be earned on the overall
project if all projected future cash flows (expenses and revenues)
do occur at the initially expected actualization rate of 𝑇𝑇𝑎𝑎 .

If the IRR exceeds the rate of return that can be earned elsewhere
(for example in a bank earnings deposit) the project should go
ahead. Otherwise, it is better to use the investment elsewhere.

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

Engineering Projects Profitability Metrics (3)

For an illustration of the concept of IIR let us consider a very simple

project with just the 2 cashflows as shown in the following figure:

At a first glance, a project where it is made an initial investment of

100 units of money and returns 200 units of money, even if only after
5 years, seems an “interesting” project… or not?
To answer this question next picture presents the value of the NPV
associated with this “project” for different values of the actualization
rate.
Manuel de Oliveira Duarte, [email protected]
Techno-Economic Analysis University of Aveiro

Engineering Projects Profitability Metrics (4)

 As can be seen, when 𝑇𝑇𝑎𝑎 increases the corresponding NPV
decreases and there a value of 𝑇𝑇𝑎𝑎 when NPV=0. This value of 𝑇𝑇𝑎𝑎
corresponds to the IIR of this “project”.

 By visual inspection it can be conclude that for this case, IIR is

around 15%.

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

Engineering Projects Profitability Metrics (5)

To consolidadate the understanding about 𝐼𝐼𝐼𝐼𝐼𝐼 consider the following:

 When 𝑇𝑇𝑎𝑎 = 𝐼𝐼𝐼𝐼𝐼𝐼, it means that the investor of the project is going to
get from the project the same that he would get from putting the
money in a bank at an actualization rate of 𝑇𝑇𝑎𝑎 . In such case it would
be indifferent to him to invest in the project or to invest in a bank.

 If 𝑇𝑇𝑎𝑎 < 𝐼𝐼𝐼𝐼𝐼𝐼, then the investor gets more from the project than from
somewhere else and the project shoul go ahead..

 If 𝑇𝑇𝑎𝑎 > 𝐼𝐼𝐼𝐼𝐼𝐼, then for the promoter of the project it is better to invest
putting the money in a bank at an actualization rate of 𝑇𝑇𝑎𝑎 or more.

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

Payback period

• The period of time taken by the project until

the CashBalance changes from negative to
positive is called payback period:
𝑃𝑃𝐵𝐵𝐵𝐵 = 𝑃𝑃: �𝑁𝑁𝑁𝑁𝑁𝑁[F 𝑖𝑖 , 𝑖𝑖 = 1 … 𝑃𝑃
] < 0}&{𝑁𝑁𝑁𝑁𝑁𝑁[F 𝑖𝑖 , 𝑖𝑖 = 1 … 𝑃𝑃 + 1] > 0�
or
𝑃𝑃 𝑃𝑃+1
𝐹𝐹𝑖𝑖 𝐹𝐹𝑖𝑖
{� 𝑃𝑃
< 0}&{ � 𝑃𝑃+1
> 0}
(1 + 𝑇𝑇𝑎𝑎 ) (1 + 𝑇𝑇𝑎𝑎 )
𝑖𝑖=0 𝑖𝑖=0

• Its calculation is simple, but it does not take

into account what happens after the recovery
period nor does it allow to measure the
profitability of the project.
30

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

Simple Example Reformulated (1)

It is now time to reformulate the “Simple Example” considered
previously taking into account the effects of time over the vlue of
Money. That is presented in the following table assuming an
actualization rate of 5%.

Discount rate 5%
Time=> 0 1 2 3 4 5 6 7 8 9 10
Capital Expenditure (CAPEX) 2 000 000 €
Operational Expenditure (OPEX) 24 000 € 36 000 61 200 122 400 244 800 440 640 749 088 1 198 541 1 797 811 2 516 936 3 272 016
Revenues 0€ 48 000 192 000 576 000 1 152 000 1 728 000 2 073 600 2 488 320 2 737 152 2 874 010 3 017 710
Cash Flow -2 024 000 € 12 000 130 800 453 600 907 200 1 287 360 1 324 512 1 289 779 939 341 357 074 -254 306
Accumulated CashFlow=CashBalance -2 024 000 € -2 012 000 -1 881 200 -1 427 600 -520 400 766 960 2 091 472 3 381 251 4 320 592 4 677 666 4 423 360
Discounted Cash Flow -2 024 000 € 11 429 118 639 391 837 746 356 1 008 680 988 371 916 622 635 783 230 173 -156 122
Discounted Accumulated CashFlow=Discounted CashBalance -2 024 000 € -2 012 571 -1 893 932 -1 502 095 -755 740 252 941 1 241 312 2 157 934 2 793 717 3 023 890 2 867 768
NPV 2 867 768 €
IIR 24%
PBP 4

In the above table have also been included the values of NPV (Net
Present Value), IIR (Internal Rate of Return) and PBP (Payback
Period)
Note:
The above table/graph comes from the companion Worksheet:
“Simple_Financial_Analysis_MOD_20191028.xlsx”

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

Simple Example Reformulated (2)

The following graphic compares the effects on CashBalance of

taking or not taking into account the effects of time:

The curves "Accumulated CashFlow=CashBalance" and "Discounted

Accumulated CashFlow=Discounted CashBalance“ refer, respectively to
not having and having taken into account the effects of time.

Manuel de Oliveira Duarte, [email protected]

Techno-Economic Analysis University of Aveiro

End
…for the time being

[email protected]

Manuel de Oliveira Duarte, [email protected]