• An 8.9% is adopted as uniform discount rate for all projects.
• A 4-year construction period is considered, plus 20 years for operation and 1 year
for decommission.
Another relevant parameter calculated in addition to NPV and IRR is the levelised
cost of production (LCoP). This can be seen as a financial assessment of the average
total cost to build and operate an investment over its lifetime distributed over total
output produced during the lifetime of the investment considering the discount effect
of each unit contribution. The LCoP can also be understood as the minimum cost at
which an output must be sold in order to break even over the lifetime of the project.
LCoP ¼
Sum of costs over lifetime
Sum of outputs produced over lifetime
¼
P n
t¼1
CAPEX t þOPEX t þDECEX t
1þi
ð
Þ
t
P n
t¼1
Output t
1þi
ð
Þ
t
3.3 Sensitivity Analysis
Sensitivity analysis enables the identification of the “critical” variables of the project.
Such variables are those whose variations, be they positive or negative, have the
largest impact on the project’s financial and/or economic performance. The analysis
is carried out by varying one variable at a time and determining the effect of that
change on the NPV. As a guiding criterion, the recommendation is to consider
“critical” those variables for which a variation of Æ1% of the value adopted in the
base case gives rise to a variation of more than 1% in the value of the NPV (Sartori
et al. 2015). The tested variables should be deterministically independent and as
disaggregated as possible. Correlated variables would give rise to distortions in the
results and double counting issues.
A particularly relevant component of the sensitivity analysis is the calculation of
the switching values. This is the value that the analysed variable would have to take
in order for the NPV of the project to become zero, or, more generally, for the
outcome of the project to fall below the minimum level of acceptability. The use of
switching values in sensitivity analysis allows making some judgements on the risk
of the project and the opportunity of undertaking risk-preventing actions.
Table 3.2 Financial flows
considered in the analysis
Inflows/outflows
Concept
Investment costs
CAPEX
Operating costs
OPEX
Decommission costs
DECEX
Inflows
Revenues
44
S. Torres-Ortega et al.
• A 4-year construction period is considered, plus 20 years for operation and 1 year
for decommission.
Another relevant parameter calculated in addition to NPV and IRR is the levelised
cost of production (LCoP). This can be seen as a financial assessment of the average
total cost to build and operate an investment over its lifetime distributed over total
output produced during the lifetime of the investment considering the discount effect
of each unit contribution. The LCoP can also be understood as the minimum cost at
which an output must be sold in order to break even over the lifetime of the project.
LCoP ¼
Sum of costs over lifetime
Sum of outputs produced over lifetime
¼
P n
t¼1
CAPEX t þOPEX t þDECEX t
1þi
ð
Þ
t
P n
t¼1
Output t
1þi
ð
Þ
t
3.3 Sensitivity Analysis
Sensitivity analysis enables the identification of the “critical” variables of the project.
Such variables are those whose variations, be they positive or negative, have the
largest impact on the project’s financial and/or economic performance. The analysis
is carried out by varying one variable at a time and determining the effect of that
change on the NPV. As a guiding criterion, the recommendation is to consider
“critical” those variables for which a variation of Æ1% of the value adopted in the
base case gives rise to a variation of more than 1% in the value of the NPV (Sartori
et al. 2015). The tested variables should be deterministically independent and as
disaggregated as possible. Correlated variables would give rise to distortions in the
results and double counting issues.
A particularly relevant component of the sensitivity analysis is the calculation of
the switching values. This is the value that the analysed variable would have to take
in order for the NPV of the project to become zero, or, more generally, for the
outcome of the project to fall below the minimum level of acceptability. The use of
switching values in sensitivity analysis allows making some judgements on the risk
of the project and the opportunity of undertaking risk-preventing actions.
Table 3.2 Financial flows
considered in the analysis
Inflows/outflows
Concept
Investment costs
CAPEX
Operating costs
OPEX
Decommission costs
DECEX
Inflows
Revenues
44
S. Torres-Ortega et al.