1. Net Present Value (NPV) examines financial performance in absolute terms. How does this differ from Benefit/Cost Ratios and Internal Rate of Return (IRR)?
2. Net Present Value requires the computation of a discount rate. Discuss the challenges this presents to an organization.
3. What is the fundamental premise of Benefit/Cost Analysis? What is the value of this analysis? What are some of the risks?
CASE STUDY: Building a Wind powered electrical generating plant
Background
Integration of wind generation into a wholesale power supply portfolio requires a proper balance between the operating characteristics of base load generation, power purchase agreement flexibility and cost of service objectives. Purchasing or generating wind power has an associated expense that must be addressed as the wholesale power supplier meets its obligation to supply a reliable, affordable and balanced supply of wholesale electric energy and related services to its member systems. The integration of wind generation into a power supply portfolio can be challenging and the "all in" costs associated with this resource must be objectively considered in order to accurately reflect the contribution this resource will make to supply portfolio pricing.
Results of a feasibility Study
A feasibility study was carried out to see what the costs and consequences would be of building the Wind powered electrical generating plant. Basic data on anticipated costs and benefits are provided in Table A and B respectively.
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Net present value is one of the major techniques evaluate an investment. NPV is the net present value of projects, it signifies net value created by the project because of future cash flows.
NPV gives the amount of value created by any project in the firm, for calculating Net Present value all the cash flows in the future are discounted at a discount rate and then the net values of discounted cash flows after subtracting the value of the initial investment is the NPV amount or the value created by the firm.
If the value created by the firm is negative this signifies that instead project destroys the value of the firm rather than creating it.
Here value signifies cash flows and the rate is discount rate. Discount rate used is cost of capital associated with particular project
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