Publication

Analysis of the economic criteria used in energy efficiency optimization of industrial systems

Serge Baechler
2011
Student project
Abstract

A previous study, of Wenk, 2011, showed, in the case of a simple heat exchanger model, inconsistencies between optimization results with different investment decision criteria. As a result, a deep analysis of the state of the art in financial decision making has been realized. Decision criteria were tested with theoretical case studies. Five theoretical energy efficiency projects and Wenk’s, 2011 simple heat exchanger optimization model were used to critically analysis the outcomes of the application of the payback, IRR and NPV decision rules. Payback and IRR showed as expected inconsistencies. NPV has proved to be the best suitable decision variable for the optimization of industrial system. In parallel, the still broad application of payback in the industry, even under evidences of drawbacks, is discussed.

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Internal rate of return (IRR) is a method of quantifying the merits of a project or investment opportunity. The calculation is termed internal because it depends only on the cash flows of the investment being analyzed and excludes external factors, such as returns available elsewhere, the risk-free rate, inflation, the cost of capital, or financial risk. The method may be applied either ex-post or ex-ante. Applied ex-ante, the IRR is an estimate of a future annual rate of return.
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