UNIVERSITI TEKNIKAL MALAYSIA MELAKA

Always a Pioneer, Always Ahead

MMCT 5223
ENERGY MANAGEMENT

1
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

MODULE 4
ECONOMIC ANALYSIS
UNIT 1 ENERGY ECONOMIC ANALYSIS
UNIT 2 LIFE CYCLE COST

2
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

UNIT 2 LIFE CYCLE COST

TOPIC 1 BUILDING AUTOMATION SYSTEM

TOPIC 2 EFFICIENT ENERGY TECHNOLOGY

3
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

Life Cycle Costing

 LCC is required to see the coupling
between the initial cost and the long
term economic performance.
 An energy project life may exceed 20
years.
 The value of annual operation
expenses is related to the time these
expenses occur.
 Because of this, the concept present
value (PV) must be utilized.
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

Life Cycle Costing (continued)

 Present Value or present worth (PW)
is the value of sum of money at the
present time that, with compound
interest, will have a specified value
at a certain time in the future.
 Use Present Value (PV) analysis to
find lowest life cycle cost (LCC)
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

Life Cycle Costing (continued)

 Purchase Cost  Operating Cost 
LCC PV  
  Disposal Cost 
 Need interest tables, a computer, or a
calculator to find these PVs
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Life Cycle Costing (continued)

 A good project has a Net Present Value
(NPV) greater than zero

 NPV = PV (cash inflows/savings)

 - PV (cash outflows/costs)

 The Internal Rate of Return (IRR) is the

interest rate (I) at which the PV of the
cash inflows/savings equals the PV of the
costs (i.e., NPV = 0)
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Time Value of Money Analysis

 S = the sum of money at the nth year.
 i = Annual interest or discount rate
 n = number of years of life of project
 The present worth P of S dollars in nth
year is
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
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The calculation method

1
P n
S
(1  i )

The term P/S=(1+i)-n is frequently

referred to as single payment present
worth factor (PWF)
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

The calculation method (continued)

 On many occasions equal amount of
equal savings/expenses are required.
 Use annual series present worth
factor (P/A=SPWF)
n
1  (1  i )
P A
i
 Where A = annual savings/payment
 P = A  [P/A, i, n] = A  [SPWF, i, n]
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

Reading the Interest Tables

To find SPWF for i=10% and n=5 years:
 Locate the 10% interest table
 Locate the column “To find P given A”,
(i.e., SPWF)
 Locate the row for n=5
 At the intersection of this row and this
Values of (PWF) and (SPWF) at a compound interest of
10%
column, read 3.7908
Year, n PWF SPWF 1/PWF

1 0.9091 0.9091 1.1000

2 0.8264 1.7355 1.2100
3 0.7513 2.4869 1.3310
4 0.6830 3.1699 1.4641
5 0.6209 3.7908 1.6105
6 0.5645 4.3553 1.7716
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

Reading the Interest Tables - Examples

 Find [P/A, 12%, 10] = 1-(1+0.12) -
10
/0.12=5.5602
 Find [P/A, 15%, 7] = 1-(1+0.15) -
7
/0.15=4.1604
 Find [A/P, 12%, 10] =1/ [1-(1+0.12) -

10
/0.12]= 0.1770 Note that A/P
=1/[P/A]
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

Reading the Interest Tables - Examples

 Find the present value of $1000 per
year savings for 8 years at a discount
rate of 10%.
P = $1000 [P/A, 10% , 8]
= $1000 [ 5.3349 ] =
$5,334.90
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

Economic Evaluation Example

A combined heat and power DG
(distributed generation) system costs
$30,000 and saves $10,000 per year.
The average life of the project is 7
years. At a discount rate of 10%,
what is the NPV of this project? Is this
a good project?
NPV = PV (savings) – PV (cost)
Solution:
NPV = A  [P/A, I, N] - Cost
NPV = $10,000  [P/A, 10%, 7] -
$30,000
= $10,000  4.8684 -
$30,000
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

Life Cycle Cost Example

A Rhino air compressor costs $30,000 to
buy and costs $15,000/year to operate
over its 10-year life. An Elephant air
compressor costs $40,000 to buy and costs
$12,000/year to operate.

Which air compressor has the lowest LCC at

a 10% discount rate?

LCC = PV(purchase cost) + PV(operating

cost)
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Always a Pioneer, Always Ahead

Solution (skeleton)
LCC Rhino = $30,000 + $15,000 [P/A, 10%,
10]
=

LCC Elephant = $40,000 + $12,000 [P/A,

10%,10]
=
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Always a Pioneer, Always Ahead

Solution (complete)
LCC Rhino = $30,000 + $15,000 [P/A, 10%, 10]
= $30,000 + $15,000 (6.1446)
= $122,169
LCC Elephant = $40,000 + $12,000 [P/A, 10%, 10]
= $40,000 + $12,000 (6.1446)
= $113,735
The elephant air compressor has the lowest LCC
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

Three Basic Economic Problems

 Find P given A, i, and n

 Find A given P, i, and n

 Find i given P, A, and n

 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

Example
A facility presently has an old boiler
and is considering installing a new
boiler in its place. The new boiler will
save the facility $5,000/year.
How much can the facility pay for the
new boiler and make a 12% rate of
return if the new system lasts 10
years?
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

Solution (skeleton)
P = A [P/A, i, n]
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Always a Pioneer, Always Ahead

Solution (complete)
P = A [P/A, i, n]
= $5,000 [P/A, 12%, 10]
= $5,000  (5.6502)
= $28,251
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

Example
A facility purchases and installs a new
chiller for $100,000. What annual
savings is required to return 15% on
this investment if the chiller lasts 10
years?
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

Solution (skeleton)
A = P[A/P, I, N]

The A/P factor is called the Capital

Recovery Factor.
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

Solution (complete)
A = P[A/P, i, n]
= $100,000 [A/P, 15%, 10]
= $100,000  0.1993
= $19,930/yr
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

Example
An equipment sales company offers
your facility a complete “turn-key”
installation of a motor retrofit for
$50,000, and says it will save you
$9,225 per year.
If the system lifetime is 12 years, what
rate of return (IRR) will your facility
make if the estimated savings is
correct?
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

Solution (skeleton)
P = A [P/A, i, n]
Solve for the P/A factor, and then
look through the interest tables –
one by one – until you find the page
that your P/A factor is on. Then, IRR
= the interest rate on that page.
$50,000 = $9,225 [P/A, IRR, 12]
[P/A, IRR, 12] =
IRR from table =
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Always a Pioneer, Always Ahead

Solution (complete)
P = A [P/A, i, n]
$50,000 = $9,225 [P/A, IRR, 12]
Scan through the tables to find this
P/A(SPWF) factor (5.42005) at the
intersection of the P/A column, and
the n =12 row. The closest number
found is 5.4206, and it is on the table
for 15% interest rate. Since this is an
extremely close number to our desired
value of 5.42005, we accept it as
close enough; so

IRR from table = 15%

 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

Solution by using a spreadsheet program

(such as Microsoft Excel)

Investment SAVINGS DURING YEARS

1 2 3 4 5 6 7 8 9 10 11 12

-$50,000 $9,225 $9,225 $9,225 $9,225 $9,225 $9,225 $9,225 $9,225 $9,225 $9,225 $9,225 $9,225

IRR= 15.0024%
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Always a Pioneer, Always Ahead

i = 10% To Find S To Find P To Find S To Find A To Find P To Find A

Given P Given S Given A Given S Given A Given P
n (S|P,i%,n) (P|S,i%,n) (S|A,i%,n) (A|S,i%,n) (P|A,i%,n) (A|P,i%,n)
1 1.1000 0.9091 1.0000 1.0000 0.9091 1.1000
2 1.2100 0.8264 2.1000 0.4762 1.7355 0.5762
3 1.3310 0.7513 3.3100 0.3021 2.4869 0.4021
4 1.4641 0.6830 4.6410 0.2155 3.1699 0.3155
5 1.6105 0.6209 6.1051 0.1638 3.7908 0.2638
6 1.7716 0.5645 7.7156 0.1296 4.3553 0.2296
7 1.9487 0.5132 9.4872 0.1054 4.8684 0.2054
8 2.1436 0.4665 11.4359 0.0874 5.3349 0.1874
9 2.3579 0.4241 13.5795 0.0736 5.7590 0.1736
10 2.5937 0.3855 15.9374 0.0627 6.1446 0.1627
11 2.8531 0.3505 18.5312 0.0540 6.4951 0.1540
12 3.1384 0.3186 21.3843 0.0468 6.8137 0.1468
13 3.4523 0.2897 24.5227 0.0408 7.1034 0.1408
14 3.7975 0.2633 27.9750 0.0357 7.3667 0.1357
15 4.1772 0.2394 31.7725 0.0315 7.6061 0.1315
16 4.5950 0.2176 35.9497 0.0278 7.8237 0.1278
17 5.0545 0.1978 40.5447 0.0247 8.0216 0.1247
18 5.5599 0.1799 45.5992 0.0219 8.2014 0.1219
19 6.1159 0.1635 51.1591 0.0195 8.3649 0.1195
20 6.7275 0.1486 57.2750 0.0175 8.5136 0.1175
21 7.4002 0.1351 64.0025 0.0156 8.6487 0.1156
22 8.1403 0.1228 71.4027 0.0140 8.7715 0.1140
23 8.9543 0.1117 79.5430 0.0126 8.8832 0.1126
24 9.8497 0.1015 88.4973 0.0113 8.9847 0.1113
25 10.8347 0.0923 98.3471 0.0102 9.0770 0.1102
 Single Sums Uniform Series
UNIVERSITI TEKNIKAL MALAYSIA MELAKA
i = 12% To Find S To Find P To Find S To Find A To Find P To Find A
Always a Pioneer, Always Ahead
Given P Given S Given A Given S Given A Given P
n (S|P,i%,n) (P|S,i%,n) (S|A,i%,n) (A|S,i%,n) (P|A,i%,n) (A|P,i%,n)
1 1.1200 0.8929 1.0000 1.0000 0.8929 1.1200
2 1.2544 0.7972 2.1200 0.4717 1.6901 0.5917
3 1.4049 0.7118 3.3744 0.2963 2.4018 0.4163
4 1.5735 0.6355 4.7793 0.2092 3.0373 0.3292
5 1.7623 0.5674 6.3528 0.1574 3.6048 0.2774
6 1.9738 0.5066 8.1152 0.1232 4.1114 0.2432
7 2.2107 0.4523 10.0890 0.0991 4.5638 0.2191
8 2.4760 0.4039 12.2997 0.0813 4.9676 0.2013
9 2.7731 0.3606 14.7757 0.0677 5.3282 0.1877
10 3.1058 0.3220 17.5487 0.0570 5.6502 0.1770
11 3.4785 0.2875 20.6546 0.0484 5.9377 0.1684
12 3.8960 0.2567 24.1331 0.0414 6.1944 0.1614
13 4.3635 0.2292 28.0291 0.0357 6.4235 0.1557
14 4.8871 0.2046 32.3926 0.0309 6.6282 0.1509
15 5.4736 0.1827 37.2797 0.0268 6.8109 0.1468
16 6.1304 0.1631 42.7533 0.0234 6.9740 0.1434
17 6.8660 0.1456 48.8837 0.0205 7.1196 0.1405
18 7.6900 0.1300 55.7497 0.0179 7.2497 0.1379
19 8.6128 0.1161 63.4397 0.0158 7.3658 0.1358
20 9.6463 0.1037 72.0524 0.0139 7.4694 0.1339
21 10.8038 0.0926 81.6987 0.0122 7.5620 0.1322
22 12.1003 0.0826 92.5026 0.0108 7.6446 0.1308
23 13.5523 0.0738 104.6029 0.0096 7.7184 0.1296
24 15.1786 0.0659 118.1552 0.0085 7.7843 0.1285
25 17.0001 0.0588 133.3339 0.0075 7.8431 0.1275
 Single Sums Uniform Series
UNIVERSITI TEKNIKAL MALAYSIA MELAKA
i = 15% To Find S To Find P To Find S To Find A To Find P To Find A
Always a Pioneer, Always Ahead
Given P Given S Given A Given s Given A Given P
n (S|P,i%,n) (P|S,i%,n) (S|A,i%,n) (A|S,i%,n) (P|A,i%,n) (A|P,i%,n)
1 1.1500 0.8696 1.0000 1.0000 0.8696 1.1500
2 1.3225 0.7561 2.1500 0.4651 1.6257 0.6151
3 1.5209 0.6575 3.4725 0.2880 2.2832 0.4380
4 1.7490 0.5718 4.9934 0.2003 2.8550 0.3503
5 2.0114 0.4972 6.7424 0.1483 3.3522 0.2983
6 2.3131 0.4323 8.7537 0.1142 3.7845 0.2642
7 2.6600 0.3759 11.0668 0.0904 4.1604 0.2404
8 3.0590 0.3269 13.7268 0.0729 4.4873 0.2229
9 3.5179 0.2843 16.7858 0.0596 4.7716 0.2096
10 4.0456 0.2472 20.3037 0.0493 5.0188 0.1993
11 4.6524 0.2149 24.3493 0.0411 5.2337 0.1911
12 5.3503 0.1869 29.0017 0.0345 5.4206 0.1845
13 6.1528 0.1625 34.3519 0.0291 5.5831 0.1791
14 7.0757 0.1413 40.5047 0.0247 5.7245 0.1747
15 8.1371 0.1229 47.5804 0.0210 5.8474 0.1710
16 9.3576 0.1069 55.7175 0.0179 5.9542 0.1679
17 10.7613 0.0929 65.0751 0.0154 6.0472 0.1654
18 12.3755 0.0808 75.8364 0.0132 6.1280 0.1632
19 14.2318 0.0703 88.2118 0.0113 6.1982 0.1613
20 16.3665 0.0611 102.4436 0.0098 6.2593 0.1598
21 18.8215 0.0531 118.8101 0.0084 6.3125 0.1584
22 21.6447 0.0462 137.6316 0.0073 6.3587 0.1573
23 24.8915 0.0402 159.2764 0.0063 6.3988 0.1563
24 28.6252 0.0349 184.1678 0.0054 6.4338 0.1554
25 32.9190 0.0304 212.7930 0.0047 6.4641 0.1547
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Single Sums Uniform Series
Always a Pioneer, Always Ahead
i = 20% To Find S To Find P To Find S To Find A To Find P To Find A
Given P Given S Given A Given S Given A Given P
n (S|P,i%,n) (P|S,i%,n) (S|A,i%,n) (A|S,i%,n) (P|A,i%,n) (A|P,i%,n)
1 1.2000 0.8333 1.0000 1.0000 0.8333 1.2000
2 1.4400 0.6944 2.2000 0.4545 1.5278 0.6545
3 1.7280 0.5787 3.6400 0.2747 2.1065 0.4747
4 2.0736 0.4823 5.3680 0.1863 2.5887 0.3863
5 2.4883 0.4019 7.4416 0.1344 2.9906 0.3344
6 2.9860 0.3349 9.9299 0.1007 3.3255 0.3007
7 3.5832 0.2791 12.9159 0.0774 3.6046 0.2774
8 4.2998 0.2326 16.4991 0.0606 3.8372 0.2606
9 5.1598 0.1938 20.7989 0.0481 4.0310 0.2481
10 6.1917 0.1615 25.9587 0.0385 4.1925 0.2385
11 7.4301 0.1346 32.1504 0.0311 4.3271 0.2311
12 8.9161 0.1122 39.5805 0.0253 4.4392 0.2253
13 10.6993 0.0935 48.4966 0.0206 4.5327 0.2206
14 12.8392 0.0779 59.1959 0.0169 4.6106 0.2169
15 15.4070 0.0649 72.0351 0.0139 4.6755 0.2139
16 18.4884 0.0541 87.4421 0.0114 4.7296 0.2114
17 22.1861 0.0451 105.9306 0.0094 4.7746 0.2094
18 26.6233 0.0376 128.1167 0.0078 4.8122 0.2078
19 31.9480 0.0313 154.7400 0.0065 4.8435 0.2065
20 38.3376 0.0261 186.6880 0.0054 4.8696 0.2054
21 46.0051 0.0217 225.0256 0.0044 4.8913 0.2044
22 55.2061 0.0181 271.0307 0.0037 4.9094 0.2037
23 66.2474 0.0151 326.2369 0.0031 4.9245 0.2031
24 79.4968 0.0126 392.4842 0.0025 4.9371 0.2025
25 95.3962 0.0105 471.9811 0.0021 4.9476 0.2021
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

Appendix for Economic Analysis

This Appendix contains additional economic

analysis examples of potential energy projects.
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

Additional Solved: Economic Examples

 Here is a group of additional
examples to practice on, and to
illustrate more opportunities for
energy savings projects.
 A solution is provided for each of
these examples.
 Each of these examples can also be
worked out using the Ten Step
Economic Spreadsheet provided.
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

Boiler Economizer Example

A boiler economizer will cost $20,000
installed, and will last for five years.
How much will it have to save each
year to return 12%?

Here, P = $20,000, i = 12%, n = 5, A

=?
A = P  [A/P, i, n]
= $20,000  [A/P, 12%, 5]
= $20,000  [0.2774]
= $5548
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

Case Study – Distributed Generation

A company is investigating the possibility of
building a distributed generation (DG) plant
with an initial investment cost of $400,000
that will save $60,000 a year in lost
production and reduced energy cost. This DG
plant has an anticipated life of 20 years and
requires an overhaul every 10 years of
operation costing $30,000. Conduct a
thorough analysis (both Present Value and
IRR) to determine whether the investment is
a wise one or not. The cost of capital is 15%
and salvage value of the plant at the end of
the year 20 is $40,000.
 UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Always a Pioneer, Always Ahead

Case Study DG1 - Conclusions

 Is this a wise investment?
 Explain?
 At what MARR does this project look
attractive or does this project never
look attractive?
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Always a Pioneer, Always Ahead

THANK YOU…
MERCI…
BEDANKT…
38