Book - School of Science and Technology

3Oil consumption(litre / month x 10 )684 Running costs252015First season105Second season(*controls malfunction)0100 200 300 400Degree days / monthFigure 23.5 Fuel oil consumption relative to degree-dayscommon use by government departments. Public sector rates are reviewed quarterly buthave remained unchanged for many years. Organisations in the private sector select a levelwhich is most appropriate to their business objectives. Whilst the required rate of returnon an investment may be set at a level higher than the discount rate, it is common practicefor the same figure to be adopted for an assessment of viability and for a comparison ofoptions. There are two important aspects which require emphasis, the first being that themethod assumes constant money value in real terms over the period considered, i.e. thatthere is either zero inflation or that inflation is at a common level across the board. Thesecond is that the analysis is sensitive to both the discount rate and the life cycle of thecomponent parts. Examples of the application of present value techniques are given in theGuide Section B18. It is normal for the private sector to expect a payback on investment of5 years or less; perhaps related to their business plan cycle.The formulae for calculating present values, discounted cash flow rates, etc., can befound in many publications, including CIBSE Guide to Ownership, Operation andmaintenance of Building Services, and there is little benefit in reproducing these here.Calculations these days are most commonly carried out by the use of simple spreadsheets,allowing parameters to be varied to test the sensitivity to input data. More detailedmodels may be developed to accommodate different inflation rates for future costs.Energy savings viability chartsIt is possible to use the tabulated figures for PV to produce what, for want of a betterdescription, may be called viability charts, plotting the ratio between capital cost andannual savings due to conservation measures against a time base. Figure 23.6(a) showshow such a chart would appear for a number of different discount rates from zero to 20%.Figure 23.6(b) takes a discount rate of 10% as a base and shows how the relationship willvary if energy costs inflate disproportionately to the general pattern.** At the time of compiling this revision, energy prices have remained effectively in line with the level ofgeneral inflation for a number of years. Relative high energy cost inflation rates could return in the future,and in consequence it is considered valid to include the methodology for carrying out cost appraisals.