41 Objective

The objective of this chapter is to present a coherent, consistent approach to economic analysis of capital investments (energy related or other). Adherence to the concepts and methods presented will lead to sound investment decisions with respect to time value of money principles. The chapter opens with material designed to motivate the importance of life cycle cost concepts in the economic analysis of projects. The next three sections provide foundational material necessary to fully develop time value of money concepts and techniques. These sections present general characteristics of capital investments, sources of funds for capital investment, and a brief summary of tax considerations which are important for economic analysis. The next two sections introduce time value of money calculations and several approaches for calculating project measures of worth based on time value of money concepts. Next the measures of worth are applied to the process of making decisions when a set of potential projects are to be evaluated. The final concept and technique section of the chapter presents material to address several special problems that may be encountered in economic analysis. This material includes, among other things, discussions of tnflation, non-annual compounding of interest, and sensitivity analysis. The chapter closes with a brief summary and a list of references which can provide additional depth in many of the areas covered in the chapter.

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