... the nominal discount rate, the escalation rate of the annual profit, and the income of the first year of operation.
Hi Mohammed,
I am not sure about if I understood your question correctly or not. But what I understood is that you want to know the Payback time of a Renewable Energy Project by taking in to account the Interest Rates? I can give you the single equation directly but it would be better on my part to explain a bit of it. Initially you have to understand about the returns in present terms. For that you have to convert all the future values in to present value terms. once you have them then you will have to subtract all the future cash inflows from cash outflows. To write in equation terms about return on investment (ROI) it will be Initial Investment(Present Date if investing today or NPV if plans to invest in future) + Sum of Future Cash Outflows NPV - Sum of Future Cash Inflows NPV. Now when you have NPV of some periodical cash flows. you will plot this values on a time based two lined graph. one line with the NPV of cash outflows and another one line with the NPV of cash inflows. The point where they both meet is the break even point or the payback period point. Also FYI NPV = PV/(1-r)^t. Where PV is the Present Value. r is the interest rate and t is the Time Duration. If you want any further info or clarity on this please feel free to post.
This is a very good question, I think the main issue is that the return is location specific, both in energy generated and the revenue for it.
A good alternative is to calculate the energy payback time and add the financial aspect to it, to do so a Life Cycle Energy Analysis is needed, by knowing the amount of energy needed to manufacture the system, and the cost in the country of origin for that energy, and compare it to the revenue of the generated energy, the actual payback time can be calculated.
I did the Energy Payback Time in my MSc thesis, I am very interested in adding the economic part to it, but didn't do so yet.
you can find my MSc thesis on my profile.
HI Mohamad,
The answer you posted looks very industry specific. Also can you elaborate how the subsequent years revenue is recognized. because there is only escalation price of electricity. are we assuming that electricity supply remains constant?
Regards,
Sampath.
in this equation, yes the electricity was assumed to be constant over the years.
You need to make financial and economic analysis will depend on the country in which you are and which type of renewable energy used, because the costs in each region of the world are different. Remember that the financial analysis ignores the value of money across time. Economic analysis, if you do this, not ignores the value of money across time.
You must use the projected five or ten year analysis to find the true profitability of the project, updated for inflation and bank interest rates to make productive investment.
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