Dear Sir Paul Louangrath

Thanks a lot for the simple and broad explanation of these terms with respect to different logical scenarios. This will be a great help. Just an extension to this question: Will you recommend to include one of these, in this kind of project where the problem is to maximize net present value of the investments?

Here are some arguments for/against some of the methods:

1) For the PV approach and perpetuity, you would need a discounting rate. The assumption of a constant discounting rate is often not true. In the case of power plants, you would probably discount some benefit amount in dollars (which is a random variable) with some interest rate (a random variable as well).

2) The PV and perpetuity assume that the power plant will not burnt down (during n periods or in perpetuity), which is surely impossible. Any potential risk and uncertainty are usually assumed to be zero in both of the methods.

3) Often these projects are decided by politicians, who cannot think over their legislation periods. So perpetuity method is surely not ideal for these particular cases.

4) Annuity only shows information from one single period and hinders differentiation between high-risk and low-risk investments.

5) Assuming risk and interest rate volatility are not issues, perpetuity shows the net asset value the best. Ownership can be transfered at any time with the same price. PV would assume that the power plant will be priced with 0$ after n periods.

In short: Each approach has assumptions. You may prefer one to the other, if you are sceptical about the assumptions in your case. On the other hand, if you do not take any assumption, your calculation may only contain minimal information.

In order to evaluate cash flows you better should use data from the financial market, such as prices of various kinds of bonds. Consult a good book about mathematical finance. But...your plant cannot be considered as a tradable, and hence it might make better sense, to include kind of a utility function as well.

But...certainly do not use the old fashioned PV- approach. As a starter , at most, this is a useful concept. By the way, it is bit odd, in your case only to use a concept as net present value, as the aim of the project is to generate heat in a district. In your case there seem to be different stakeholders, and hence you should not oversimplify the problem at hand!