Role Of Operating Costs In Determining Net Present Value

摘要

There are many factors used by municipalities for the selection of capital equipment from among competing providers. The factors employed range from subjective (reputation, relationship, etc.), to quantitative (price, operating cost, etc.). This article focuses on some of the requirements of an accurate and objective cost comparison. Over the operating life of a piece of process equipment (20 years is common), the cost of operation can dwarf the original capital cost of the equipment. A net present value calculation is an effective tool used to evaluate projects based on cash outflows and inflows. The NPV discounts cash flows to a present value and allows the evaluator to compare projects based on the results. The challenge in preparing a meaningful NPV comparison lies in the accuracy and timing of the cash flows. Compounding the issue is the fact that information about operating costs which make up the majority of the cash outflows are provided by vendors.