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Net Present Cost

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The net present cost (or life-cycle cost) of a Component is the present value of all the costs of installing and operating the Component over the project lifetime, minus the present value of all the revenues that it earns over the project lifetime. HOMER calculates the net present cost of each Component in the system, and of the system as a whole.

Example: A diesel generator has an initial capital cost of $96,000, a replacement cost of $48,000, and a lifetime of 3.52 years. Its cost of operation and maintenance (O&M) is $2,471/yr, and its fuel cost is $34,969/yr. What is the net present cost of this generator over a 25-year project lifetime at an annual real discount rate of 6%?

To perform this calculation, HOMER produces a Cash Flow table such as the one below. Except for the salvage value that occurs at the end of the 25th year, all of these cash flows are costs, so they appear as negative numbers in the table.

The first column shows the time at which each cash flow occurs, in years since the start of the project. The capital cost occurs at the start of the project, or year zero. The annual O&M and fuel costs occur at the end of each year. The replacement costs occur every 3.52 years.

The second column, highlighted in yellow, contains the discount factor. The columns highlighted in green contain the nominal cash flows. The columns highlighted in purple contain the same cash flow discounted to year zero. HOMER calculates the discounted costs by multiplying the nominal costs by the discount factor.

The bottom row below the purple discounted cash flow columns contains the net present value of each category of cash flow, as well as the total net present value, shown in red, with a value of -$725,240. The net present value and the net present cost differ only in sign, so the net present cost of this generator over the 25-year project lifetime is $725,240.

HOMER does a similar analysis for each Component in the system, and for the system as a whole.

Year

Discount

Nominal Cash Flows

Discounted Cash Flows

 

Factor

Capital

Replace-ment

Salvage

O&M

Fuel

Total

Capital

Replace-ment

Salvage

O&M

Fuel

Total

0

1.000

-96,000

 

 

 

 

-96,000

-96,000

 

 

 

 

-96,000

1

0.943

 

 

 

-2,471

-34,969

-37,441

 

 

 

-2,331

-32,990

-35,321

2

0.890

 

 

 

-2,471

-34,969

-37,441

 

 

 

-2,200

-31,123

-33,322

3

0.840

 

 

 

-2,471

-34,969

-37,441

 

 

 

-2,075

-29,361

-31,436

3.52

0.815

 

-48,000

 

 

 

-48,000

 

-39,098

 

 

 

-39,098

4

0.792

 

 

 

-2,471

-34,969

-37,441

 

 

 

-1,958

-27,699

-29,657

5

0.747

 

 

 

-2,471

-34,969

-37,441

 

 

 

-1,847

-26,131

-27,978

6

0.705

 

 

 

-2,471

-34,969

-37,441

 

 

 

-1,742

-24,652

-26,394

7

0.665

 

 

 

-2,471

-34,969

-37,441

 

 

 

-1,644

-23,257

-24,900

7.04

0.663

 

-48,000

 

 

 

-48,000

 

-31,847

 

 

 

-31,847

8

0.627

 

 

 

-2,471

-34,969

-37,441

 

 

 

-1,551

-21,940

-23,491

9

0.592

 

 

 

-2,471

-34,969

-37,441

 

 

 

-1,463

-20,698

-22,161

10

0.558

 

 

 

-2,471

-34,969

-37,441

 

 

 

-1,380

-19,527

-20,907

10.56

0.540

 

-48,000

 

 

 

-48,000

 

-25,941

 

 

 

-25,941

11

0.527

 

 

 

-2,471

-34,969

-37,441

 

 

 

-1,302

-18,421

-19,723

12

0.497

 

 

 

-2,471

-34,969

-37,441

 

 

 

-1,228

-17,379

-18,607

13

0.469

 

 

 

-2,471

-34,969

-37,441

 

 

 

-1,159

-16,395

-17,554

14

0.442

 

 

 

-2,471

-34,969

-37,441

 

 

 

-1,093

-15,467

-16,560

14.08

0.440

 

-48,000

 

 

 

-48,000

 

-21,130

 

 

 

-21,130

15

0.417

 

 

 

-2,471

-34,969

-37,441

 

 

 

-1,031

-14,592

-15,623

16

0.394

 

 

 

-2,471

-34,969

-37,441

 

 

 

-973

-13,766

-14,738

17

0.371

 

 

 

-2,471

-34,969

-37,441

 

 

 

-918

-12,986

-13,904

17.60

0.359

 

-48,000

 

 

 

-48,000

 

-17,212

 

 

 

-17,212

18

0.350

 

 

 

-2,471

-34,969

-37,441

 

 

 

-866

-12,251

-13,117

19

0.331

 

 

 

-2,471

-34,969

-37,441

 

 

 

-817

-11,558

-12,375

20

0.312

 

 

 

-2,471

-34,969

-37,441

 

 

 

-771

-10,904

-11,674

21

0.294

 

 

 

-2,471

-34,969

-37,441

 

 

 

-727

-10,286

-11,013

21.12

0.292

 

-48,000

 

 

 

-48,000

 

-14,020

 

 

 

-14,020

22

0.278

 

 

 

-2,471

-34,969

-37,441

 

 

 

-686

-9,704

-10,390

23

0.262

 

 

 

-2,471

-34,969

-37,441

 

 

 

-647

-9,155

-9,802

24

0.247

 

 

 

-2,471

-34,969

-37,441

 

 

 

-610

-8,637

-9,247

24.64

0.238

 

-48,000

 

 

 

-48,000

 

-11,420

 

 

 

-11,420

25

0.233

 

 

43,120

-2,471

-34,969

5,679

 

 

10,047

-576

-8,148

1,323

Total

 

-96,000

-336,000

43,120

-61,784

-874,234

-1,324,899

-96,000

-160,668

10,047

-31,593

-447,026

-725,239

Note that HOMER uses the discount factor to account for the time value of money, not inflation. Inflation is factored out of the analysis by using the real discount rate instead of the nominal discount rate. All costs in the table above are in year-zero dollars. This explains why the fuel and O&M costs remain the same for each year of the project lifetime.

Even with inflation removed from the analysis, the time value of money dictates that a future cash flow is worth less than a present cash flow of the same amount. The discount factor accounts for this effect; its value decreases with the increasing number of years from the start of the project.

See also

Total net present cost

Annualized cost

Present value

Future value

Salvage value

Project lifetime

Real Discount rate

Discount factor

Cash Flow table

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