Paper Authors

Abstract

NOTE: The first page of text has been automatically extracted and included below in lieu of an abstract

Session 2139

The Engineering Economics of Energy Use and Capital Investment

Janis P. Terpenny, Lawrence L. Ambs, John R. Dixon, Julia L. Sullivan,1 and William G. Sullivan2 University of Massachusetts, Amherst, MA1/ Virginia Polytechnic Institute and State University, Blacksburg, VA2

Abstract

A potential capital investment involving energy use or energy conservation is always in competition with other possible uses of the same available capital. The competition may come from other energy related projects, or from proposals for, say new production equipment. The situation of “Pay Now - Save Later” is common for energy related decision problems. The comparison of competing energy-related projects is often complicated with unequal useful lives and typically includes substantial initial investments and a variety of recurring costs. Methods of comparison that are frequently used include payback period, return on investment (ROI), and net present value. Further, unit costing methods are needed to account for unit costs of electricity and steam, and are used to determine incremental change in the busbar price of electricity that is sold to consumers (i.e., the price of electricity from the plant excluding outside factors such as transmission lines or local distribution services). Clearly, energy use and energy related capital investment decisions require good skills in economic analysis. They also provide intuitive and rich examples for teaching the basics of engineering economics. This paper provides a primer that can be used to teach the basic principles of economic analysis necessary to understand and evaluate energy-related alternatives. The paper includes an introduction to the concepts of time value of money, present worth, effects of escalating energy costs, levelized cash flows, project life, depreciation, taxes, and interest rates. Methods used to rationally compare alternatives such as simple payback period, discounted payback period, internal rate of return, net present worth analysis, and annualized costs are presented on a basic level, and then applied to energy examples in the paper. While the methods of analysis pertain specifically to situations where energy- related alternatives are being considered, the paper serves as primer that can be used as a module on basic principles of economics applied to a variety of topics for practitioners or university students.

1. Introduction A potential capital investment involving energy use or energy conservation is always in competition with other possible uses of the same available capital. The competition may come from other energy related projects, or from proposals for, say new production equipment. In any case, it is always important for managers and engineers to be able to evaluate and justify energy related proposals on economic grounds. The economic situation is one of “Pay Now – Save Later”, and so the main issue is: Are the future savings worth the present cost of the investment? A method of analysis is required that

Proceedings of the 2003 American Society for Engineering Education Annual Conference & Exposition Copyright  2003, American Society for Engineering Education

• Citation

• Format
  • APA
  • APA - LaTeX bibitem
  • MLA
  • MLA - LaTeX bibitem
  • Bibtex
  • EndNote - RIS

Sullivan, W., & Ambs, L., & Sullivan, J., & Dixon, J., & Terpenny, J. (2003, June), The Engineering Economics Of Energy Use And Capital Investment Paper presented at 2003 Annual Conference, Nashville, Tennessee. 10.18260/1-2--11377