ECONOMIC EVALUATION

Economic Evaluation of Sustainable Technologies

Executive Summary

The purpose of this paper is to discuss the feasibility analysis of the three alternatives of energy sources for the Mr. Smith. Furthermore, the paper will highlight the significance of the Net Present Value (NPV) method in choosing the best alternative decision. Since all the three projects fall under the category of mutually exclusive projects, therefore the family can choose only one energy alternative.

Economic Evaluation of Sustainable Technologies

Stage 1 - Initial Feasibility Analysis

Mr. Smith family must keep different financial and non financial factors in mind while making the investment decision. The financial factors include the financial indicator such as Net present value, internal rate of return, Payback period etc. NPV should be greater than zero for the project to be feasible. Moreover, greater the IRR, more attractive is the project. On the other hand, payback period should be as low as possible. The non financial considerations include the economic situation, future trend of the economic indicators, analysis of the competitors, the political situation and the restrictions imposed by the local government. All these factors are equally important from investment point of view.

The cost of capital is the weighted average cost of debt and equity in the investment. In the case under discussion, the cost of capital is 7.5%. Since, the project is entirely equity based, 7.5% may also be called the cost of equity. The project must generate at least this percentage in order to cover the cost of the owner's equity.

The family is recommended to undertake the alternative 2 i.e. Ground Source Heat Pump due to the due to the reason that NPV is positive and generating a positive net worth for the family. Even the sensitive analysis have not been not very adverse, NPV remains positive even changing the discount rate substantially as shown in the appendix. If the family is proficient and makes efficient utilisation of the resources, the resulting outcome would be a successful and revenue generating project. Moreover, the project is less risky as the family is without any financial leverage. The investment is entirely equity based, which means that, even in case of low or negative returns, the family will be not liable to any creditors.

The logic behind selecting the Alternative 2 - Ground Source Heat Pump is NPV, which means that having £1 now is of greater value than having £1 in the future as the £1 could be invested and a return could be earned. Thus the idea of NPV is to consider the future cash inflows and outflows of a given project and convert them into the present value using the rate of return that is expected to be earned over the investment. This means it takes into account the time value of money. A situation where two or more projects are available in hand the NPV calculation would support to compare each of them against today's values and thus decide the project that is best to be carried out, to increase the ...