Comparison of two procedures for evaluating the economics of industrial power plants
This report compares two economic-evaluation procedures that are commonly used to evaluate engineering alaternatives for industrial power plants. the procedures are: discounted cash flow analysis (e.g., present worth and internal rate of return) and the revenue requirement method. The former procedure tends to be used by nonregulated, for-profit companies, while the latter is widely accepted in regulated utilities. Each analytical procedure is the same, namely, a conceptually sound assessment of economic differences among engineering projects such that the least-cost (or most profitable) project can be selected. It is demonstrated that the two procedures, when based on the same assumptions, produce the same preference rankings among alternatives being considered. In addition, the same incremental projected levelized cost streams are generated. Furthermore, it is shown that the effect of inflation and special tax incentives can be readily evaluated with both procedures and that identical results are obtained. For mutually exclusive alternatives, it is shown that the ratio of present worth of costs between the alternatives is identical to the ratio of levelized revenue requirements for selected debt-equity financing schemes. It is concluded that both methods of project evaluation provide consistent results in terms of relative economic differences among alternatives being considered. It should be noted that the quantification of economic differences (e.g., dollars per million Btu) among industrial power plants is not necessarily synonymous with estimating costs for the purpose of establishing a selling price for a commodity or service. This report centers on evaluation of after-tax economic differences among alternatives rather than development of estimates of a project's before-tax operating revenues that could be used, in turn, to formulate a firm's policy regarding energy prices.
- Research Organization:
- Oak Ridge National Lab. (ORNL), Oak Ridge, TN (United States)
- DOE Contract Number:
- W-7405-ENG-26
- OSTI ID:
- 6018747
- Report Number(s):
- ORNL/TM-6872
- Country of Publication:
- United States
- Language:
- English
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