Discounted cash flow of electric utility projects
Although the discounted cash flow technique has been in use for many years and is readily accepted by companies as a basic tool for financial analysis, there still is an aura of mystery surrounding its specific application to project evaluation, particularly in the electric utility industry. Some of the resistance to its use stems from the prevailing feeling that this method is too complicated because it requires time comsuming calculations. The specific difficulty centers around the lack of understanding of what the cash flow represents and how it is discounted. In the electric utility industry, an additional hurdle is encountered because of the existence of an established technique that is used almost universally based on levelized fixed charges. These in turn are derived from the fundamental revenue requirements that underlie most utility calculations. This paper will not pit discounted cash flow against revenue requirements, but rather show that they are complementary techniques and yield answers that can be reconciled with one another. Levelized fixed charges are popular because they serve as a short-cut for utility engineers who need to make numerous comparisons of design alternatives. Although this technique is basically sound, it has encountered difficulty in its application to major projects, because of the lack of flexibility to cope with such things as interest during construction, varying project lives and investment tax credit. Discounted cash flow is not limited by any of these conditions and has the added advantage of providing the actual cash flow of the project on a year-to-year basis.
- Research Organization:
- Wisconsin Electric Power Co., Milwaukee
- OSTI ID:
- 5108019
- Report Number(s):
- CONF-770631-
- Journal Information:
- Trans. Am. Assoc. Cost Eng.; (United States), Journal Name: Trans. Am. Assoc. Cost Eng.; (United States); ISSN AACTA
- Country of Publication:
- United States
- Language:
- English
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