Economic performance measures Clause Samples

Economic performance measures. Given the calculated production costs and revenues from product selling, economic performance measures for the whole biorefinery plant can be derived. The aim is to compare the economic performance of different biorefinery concepts, processes and products. Therefore indicators of economic performance are needed. These are usually derived from Discounted Cash Flow models (DCF) and include the Net Present Value (NPV) and Internal Rate of Return (IRR), the Payback Time and the Return on Investment (ROI) of the project. An investment is typically characterised by negative cash flows at the beginning of the project (the investment) and positive cash flows generated by selling the products during the operating time of the plant (the typical project lifetime lies between 15-25 years and for the inter-project harmonization, a lifetime of 15 years had been chosen as the common base case). All information on cash flows along the lifetime of a plant can be summarized in a table that contains information about forecast sales and selling prices, sale income less operating costs, net cash flows and the discounted net cash flow at a certain discount rate (for the inter- project harmonization, a discount rate of 5% had been chosen). The Net Present Value (NPV) is defined as the sum of discounted net cash flows: n æ Net cash flow ö NPV= åç The decision criterion for the evaluation of an investment project is that the NPV should be at least zero or positive. The choice of a higher discount rate implies a higher discount, i.e. devaluation of future cash flows, which could reflect higher risks of the project. The Internal Rate of Return (IRR) is defined as the discount rate at which the NPV is just equal to zero (▇▇▇▇▇▇▇ et al. 2011). The higher the IRR, the more favourable the investment project appears because it implies that future cash flows could be discounted at a higher discount rate until the NPV would become zero. When comparing different scenarios, NPV and IRR may lead to different results. This situation is exemplified in Figure 5. In this example, the project P1 has the highest NPV at lower discount rates while the project P2 has the highest IRR. Figure 5: The relation between NPV, discount rate and IRR Source: nova 2011 This example highlights the importance of choosing an appropriate discount rate. The discount rate reflects both the risks of a project and time preference. The higher discount rates are, the sooner future cash flows loose their weight in calculat...