3. Economic analysis
The final economic analysis of the alternatives is carried out
once the total present value of the refurbishment and uprating cost
and the present value of the operating benefits have been calculated.
In order to make realistic investment decisions, each monetary
value must be identified by both amount and time. Amount
evaluated at different time should not be directly compared or
combined. The amount evaluated at different time periods may be
made equivalent by multiplying future amounts by a factor
becoming progressively smaller into the more distant future. The
discount rate is the time rate of decrease in this factor expressed in
percent per time period. An investment of a rupee at an annual rate
of return of 10% would yield INR 1.10 a year. Similarly, INR 1.10
available a year from now is equivalent to INR 1.00 now, when
discounted by 10%. The difference between the present value of the
future cash flows from an investment and the amount of investment
is defined as the net present value. Present value of the expected
cash flows is computed by discounting them at the required
rate of return [4e10]. The discount rate used has a great influence
on the project selected. Future benefits and costs receive less
weight with higher discount rate, and more weight with lower
discount rates. Higher discount rate favors projects with the little
initial investment, while low discount rates favor capital intensive
projects. A net present value (NPV) positive means a better return
whereas, a negative NPV results a worse return. NPV is one of the
two analysis techniques, the other being the IRR (internal rate of
return) used in economic appraisal of engineering projects, where
the income flow varies with the passage of time [11e15].