Book - School of Science and Technology

Investment appraisals 683Type Item Life (years)Fans, roof mounted 15±20Grilles, diffusers, etc. 25±30VAV or DD control terminals 15±20fan coil units 15±20Variable refrigerant units 10±15Chilled ceiling, beams 20±25Controls Pneumatic 15±20Electric/electronic 12±20Self-contained 10±20Sensors 3±10BMS outstations 5±15Actuators 10±20Electric Motors motors and starters 15±20manufacture, level of maintenance, hours of use and its suitability to the mode ofoperation. As a consequence, a spread of years is offered for guidance in the table.Further reference may be made to recent publications.Payback periodProbably the most common term used when assessing the viability of a proposal toreplace an existing scheme with one to be justified on grounds of running cost savings,such as energy saving methods, is simple payback period, i.e. the number of years requiredfor a capital expenditure to be recovered through annual income or, in the context ofenergy conservation, annual savings. Nevertheless, using raw cost data, payback is arather crude concept for use in decision making since it takes no account of the fact thatcapital, if invested elsewhere, would earn interest. For example, if an energy conservationmeasure to reduce annual running cost by £2000 required capital expenditure totalling£8000 this would give a simple payback period of £8000/2000, i.e. 4 years. Also, the valueof future revenue costs or savings is affected by inflation; this interest on capital may beconsidered together in respect of the `time value of money'.Present valueThe concept of present value (PV) has much to commend it since it is easy to understandand can handle staged expenditure or known changes in the pattern of annual saving. Inbrief, present value analysis converts all outgoings ± including capital expenditure, runningcosts, repairs and where appropriate all income, to their equivalent values asmeasured at a single point in time, usually the present. The analysis relies upon the factthat a pound today is worth more than a pound tomorrow ± inflation aside ± since iftoday's pound were invested it would have earned interest by tomorrow. Thus, stating theconverse, a pound at some future date is worth less than a pound today: the value willhave been reduced ± or discounted ± in proportion to the rate of interest assumed.Most relevant works of reference contain tables listing present values over a wide rangeof time periods for selection of interest or discount rates. The public sector, for exampleNHS Hospital Trusts, uses a discount rate (sometimes referred to as the Test DiscountRate, TDR) of 6% at 2000 (ref. NHS Capital Investment Manual), and 6% is also in