Making Decisions For Alternate Investments

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There are several methods for determining which energy conservation alternative is the most economical. Probably the most familiar and trusted method is the annual cost method,35

When evaluating replacement of processes or equipment do not consider what was previously spent. The decision will be based on whether the new process or equipment proves to save substantially enough in operating costs to justify the expenditure.

Equation 9-16 is used to convert the lump sum investment P into the annual cost. In the case where the asset has a value after the end of its useful life, the annual cost becomes:

where

AC is the annual cost

L is the net sum of money that can be realized for a piece of equipment, over and above its removal cost, when it is returned at the end of the service life. L is referred to as the salvage value.

As a practical point, the salvage value is usually small and can be neglected, considering the accuracy of future costs. The annual cost technique can be implemented by using the following format:

Alternate 1 Alternate 2

2. Estimated life (n)

3. Estimated salvage value at end of life (¿)

4. Annual disbursements, including energy costs & maintenance (E)

5. Minimum acceptable return before taxes (i)

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Project Management Made Easy

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