Calculation Procedure of the Economic Evaluation
The basis for the economic evaluation is a dynamic profitability calculation.
To do this, enter the Economic input data in the technical components: Investment costs, Term of depreciation, Reinvestment, and Operating costs.
The Variant comparison calculates the Net present value, the final value (Accumulated value), and the Internal rate of return from the respective differences of the Investment costs and the Cash flow of the corresponding variant compared to the Reference case in combination with the costs for energy purchases from the tariffs. The discount factors required for determining the cash value (see below for formula) are fixed.
The Net present value calculation yields the Dynamic payback period, both decisive economic results.
Equivalent Annual Cost
The Net present value is distributed over the useful life using the annuity method. In this way, the payment sequence of incoming and outgoing payments is converted to annuity (annual payment, equivalent annual cost). This results in recurring payments of a constant amount and at regular intervals.
Calculated Values
The results of the economic efficiency comparison are displayed in the Variant comparison. They can be viewed in more detail in the Excel export files. Each of the selected periods can be viewed there. The calculation formulas can be displayed for each cell with a calculated value (see following figure).
In the Excel file, the Earnings before interest, taxes, depreciation, and amortization (EBITDA) for each variant are given first in the Economic Evaluation. EBITDA is the sum of costs and revenues from plant operation, energy flows, and debt (for the latter only the cost).
Investment costs are spread evenly over the periods under review and subtracted from EBITDA as Depreciation. The result is earnings before interest and taxes, EBIT short.
In the next step, any interest costs from debt capital are subtracted from EBIT. This results in earnings before taxes, EBT.
If you subtract the calculated tax burden from EBT, you get the earnings after tax, EAT. The after-tax result is the profit after deduction of income taxes. A positive Difference in EAT compared to the reference case means an advantage of the variant.
Cash flow is made up of payments received and made in a specific period in connection with the company’s operating activities, investing activities or financing activities. This includes, for example, energy costs and revenues, but also interest on debt, taxes with an effect on payment, and investment payments. Cash flow is calculated by subtracting from EBITDA the interest cost of debt, the cost of tax payments and, if applicable, reinvestment costs (at the time). A Cash flow difference results from the cash flow of the Reference case and the Cash flow of the Variant. A positive Cash flow difference in the variant comparison means that the variant has a cash flow saving compared to the reference case.
The Cash flow difference is multiplied by the discount factor to determine the present value for the respective period. The discount factor is calculated from the calculation Interest rate \( i \) (default setting: 4 %) and the Period under consideration (in years) \( n \) stored in the Variant comparison Input data for the Economic parameters using the following formula:
\( \begin{equation} \begin{aligned} \dfrac{1}{(1+i){^n}} \end{aligned}\end{equation}\).
The Net present value (NPV) is the sum of all future cash flows arising from an investment, discounted to the present. It serves as a key figure for assessing the profitability of an investment. A higher NPV means a more advantageous variant compared to the reference case. The net present value is calculated as the sum of the negative investment costs and the negative or positive present values of the periods. If the present value is positive, the investment is deducted by the respective present value per period. After a certain number of periods, a positive Net present value arises. The investment is amortized at a certain point in time. If the present values are negative, the Net present value cannot become positive. There is no payback. The variant is then no more lucrative than the potential revenues from the calculation interest rate (alternative investment).
The Dynamic payback period (Payback time) is the time after which the capital value of an investment equals zero. It shows how long it takes for an investment to recover the initial payment plus interest. If the acquisition cannot be amortized in the Period under consideration, the Dynamic payback period is shown as null. When Managing scenarios, there may be several payback periods that become visible in the Chronological trend because of later investments. The payback time of the investments made in the last support year is output by the Variant comparison.
The Accumulated value (final value) is the value of one or more payments at the end of an observation period, which results from the compounding of the payments (interest and compound interest). This is the amount available to the investor at the end of the selected Period under consideration (in years). From an economic point of view, the investment with the highest Accumulated value should be preferred to the other variants because a higher final value of a variant means higher or earlier positive cash flows compared to the reference case and is advantageous when interest and the observation period are taken into account. The Accumulated value is determined by compounding the present value with the compounding factor, which is reciprocal to the discount factor.
If further investments (reinvestments) are required after the initial investment in period 0 or if an investment package is planned with different investment dates (for example, by Managing of scenarios), the costs for the later investments are discounted in the present values. In this case, the accumulated present value may decrease after the first period, thus delaying the amortization. In addition, a project that has already been amortized may once again slip into the range of negative cumulative present values. In these cases, TOP-Energy outputs the first time point with a positive cumulative present value as the amortization time point. The net present values of such projects are correctly calculated (finite) chain net present values due to the discounted ingoing investment costs.
The Internal rate of return is the interest rate at which the Net present value of an investment or project is zero. The internal rate of return shows the effective interest rate of an investment and serves as a profitability indicator. If no savings can be achieved in operations as a result of the investment, the variant has higher expenses than the reference case and no rate of return can be calculated (output: null).
CAPEX and OPEX
In internal accounting, capital expenditures (CAPEX) comprise a company’s capital expenditure on long-term assets, for example plants, buildings, or vehicles.
Operational expenditures (OPEX) are expenses relating to business operations. They include costs for operating supplies and raw materials as well as personnel and energy costs.
CAPEX and OPEX constitute TOTEX, the total expenditure of a company.
In TOP-Energy, CAPEX and OPEX are entered separately in Investment and Operating costs in the Economic input data of the technical components. The energy costs, in contrast, are specified in the tariff components. In the Variant node, these costs are summarized as a total and optionally displayed as a detailed overview (see the following figure).
In the Variant comparison node, the costs of the variants are compared to a reference variant to be defined (see following figure).
CAPEX includes not only investments in plants, but also their maintenance. The user has two options to specify these costs: in the operating costs as Miscellaneous costs or as Partial operating costs per investment. In the Variant comparison, all costs for plant operation are summarized as Operating costs and thus evaluated as OPEX (see following figure).
