Annuities as a tool of investment appraisal calculations of static projects in electrical grids

Abstract

Introduction.  The article is devoted to analysis of annuities as the computational tool that may ease discounted investment appraisals in electrical grids.

Purpose.  The purpose is to study the possibilities of perpetual annuity, which is applied in a guiding industrial document for evaluation of static projects, to provide correct estimations of investments in electrical grids with time limited profitable periods of operation.

Method (methodology).  The analysis is based on the concept of net cash flow which is traditionally applied in capital budgeting studies.  Present value factor appraisal method is used to test annuities.  Comparative method is applied to evaluate the relative error of NPV estimations based on perpetual annuity.

Results.  It is shown that perpetual annuity arranges a coherent appraisal system of static projects combined of ordinary and discounted methods with contradictory methodological background.  The resulting dependence of estimation period on the rate of discount is revealed to impede the simultaneous evaluations of projects in electrical grids with different functionality, terms of profitable operation, voltage levels and electricity transmission volumes.  The application of perpetual annuity provides noticeable errors in the calculation of NPV leading to incorrect market-oriented evaluation of projects.  The ranking procedures are affected further as well.  The time-limited annuity is found out to be more consistent with these issues and may be recommended to ease the computations of discounted values without loss of accuracy.  These findings can be helpful for grid operators in developing workable computational procedures of investment appraisals with relevance to new challenges of electrical grids and power industry in a changing market environment.