Egyptian Electricity Holding Company (EEHC)

Strategic Planning Sector Economical Studies Department

Presentation in

Case Study & Cost Benefit Analysis

Prepared by Eng. Mohamed Rashad Mojahed

Cost Benefit Analysis COST-BENEFIT ANALYSIS:

It is a systematic process for calculating and comparing benefits and costs of an investment. In other Word It determines the expected benefits and savings from a candidate system and compare them with costs.

Cost Benefit Analysis It helps in answering the following questions :

Will the project generate adequate cash flow and profits? Will the project withstand the risks it will encounter? Will the project remain viable in the long-term? Will the project meet the goals of the founders?

Cost Benefit Analysis Steps of Cost-Benefit Analysis

1
collect enough data about elements of costs and Benefits of project

2
Predict a cash flow for costs& Benefits over the Project life time

3
Select a discount rate and Calculate NPV & IRR of the project

4
Make a sensitivity analysis

Cost Benefit Analysis Types of Costs Benefit Analysis

Financial Cost-Benefit Analysis

Economical Cost-Benefit Analysis

Cost Benefit Analysis Financial Cost-Benefit Analysis:

It looks at the project from the point of view of the implementing agency. It determine the ability to meet its financial obligations and to finance future investments. It is based on the Market prices.

Economical Cost-Benefit Analysis:

It looks at a project from the point of view of the entire country (society). It measures the effects of the project on the economy as a whole. It is based on the Real prices.

Cost Benefit Analysis Cost-Benefit Analysis for A combined cycle power plant

Why the CCGT ?

the feasibility study for the CCGT contains most of the assumptions and steps which can be used and applied to any other type of power plants (thermal Hydro wind solar).

A General Description for CCGT:

Items of Cost Benefit Analysis

Capital Cost
Operation and maintenance costs

Fuel costs Project Revenues Income Statement Cash Flow net income

Capital Cost

Capital Cost
-It is the costs of equipments and materials that will be used in the construction process of the power plant.

Components of Capital Cost

Direct Costs Components

Un certainty components

Capital Cost Direct Costs component:

-It is costs which can be traced directly to a specific object like: Land. Buildings. Construction materials. Equipments. Steam Turbines Gas Turbines Switch yards Transformers

Capital Cost Risk & Un certainty Components

It is the probability that an return of an investment actual will be different than expected.
Positive Way Wrong Way

Increase In Profit Reduction In Costs

Decrease In Profit Increase In Costs

Capital Cost Risk & Un certainty Components Causes of Risk & Un certainty: Increasing in the prices of raw materials The lapsing of deadlines for construction of a new operating facility. The change of a political system Natural disasters

Capital Cost Risk & Un certainty Components

There are some values and components which can be taken into consideration during the estimating of the total capital cost of the project to reduce the levels of uncertainty and eliminate economic risk as much as possible.

Working Capital

Physical Contingency

Price Contingency

Capital Cost Risk & Un certainty Components

Working Capital: It is a financial metric which represents operating liquidity (liquid money) available to a business, Along with fixed assets such as plant and equipment. In other word Working capital is an amount of liquid money which is adequate to cover costs of operation of the power plant during its starting operation period in case of the power plant does not gained profit during that period. It equals to (60) day of operation and maintenance costs in addition to (30) day of fuel costs.

Capital Cost Risk & Un certainty Components

Physical Contingency The estimated costs of the additional real resources expected to be required Price Contingency It is considered against changes in relative prices of project inputs due to general inflation and changes in the value of monetary units .

Capital Cost Risk & Un certainty Components

Financial Cost Benefit Analysis:

All Uncertainty components: Working Capital Physical contingency Price Contingency) are added to the Direct Costs of the Capital cost.

Capital Cost Risk & Un certainty Components

Economical Cost Benefit Analysis: Price contingency They are not added to the direct capital costs of the power plant. Physical Contingency & Working Capital Physical contingency represent expected real costs so it is added to the direct capital costs of the power plant

Operation & Maintenance costs

Operation & Maintenance Costs

Definition:
It includes costs of all various services required to assure that the power plant will perform the functions it was designed and constructed for. Operations and maintenance are combined into the common term O&M because a facility cannot operate at peak efficiency without being maintained; therefore the two are discussed as one.

Operation & Maintenance Costs

Types of Operation & Maintenance Costs

Variable O&M

Fixed O&M

Operation & Maintenance Costs Variable operation & maintenance costs

These costs, defined as $/MWh, which refers to the the operations and maintenance costs which changes according to the changing in the production level of the electrical energy by one unit.

Example:
Minor unplanned maintenance. Periodic maintenance costs. Water treatment chemicals.

Operation & Maintenance Costs Fixed operation & maintenance cost

These costs, defined as $/kW/year, this type of costs is a fixed costs which do not change with changing in the production level of electrical energy.

Example:
Plant manager's office & employee salaries. Technical support costs.

Operation & Maintenance Costs

Financial Cost Benefit Analysis:

Operation & Maintenance Costs

Financial Cost Benefit Analysis: Column (D) This column represents the total installed capacity (MW) of the power plant, which assumed in the ideal case to be fixed over the project life time Column (E) This column represents the total energy generated (GWH) from the power plant at specific capacity factor Total Energy generated per year (GWH) = Total installed capacity (MW) * number of hours per year * capacity factor (%)

Operation & Maintenance Costs

Financial Cost Benefit Analysis: Column (F) This column represents the Fixed O&M costs for each year over the project life time in (million $). Fixed O&M costs (million $) = Fixed O&M costs ($/KW/yr) * Total installed capacity (MW) / 1000 Note 1: (For Year 2013) The Value of Fixed O&M costs ($/KW/yr) year 2013 is the escalated value of Fixed O&M costs ($/KW/yr) at the base year 2009 (With escalation Rate 3%).

Operation & Maintenance Costs

Financial Cost Benefit Analysis: Note 2: An escalation Rate (3%) has been taken into consideration in calculating the values of Fixed O&M costs Over the project life time.

Operation & Maintenance Costs

Financial Cost Benefit Analysis: Column (G) This column represents the Variable O&M costs for each year over the project life time in (million $). Variable O&M costs (million $) = Variable O&M costs ($/GWh) * Total generated energy (GWh) Note 1: (For Year 2013) The Value of Variable O&M costs ($/Mwh) year 2013 is the escalated value of Variable O&M costs ($/KWh) at the base year 2009 (With escalation Rate 3%).

Maintenance & Operating Expenses Operation & Maintenance Costs

Financial Cost Benefit Analysis: Note 2: An escalation Rate (3%) has been taken into consideration in calculating the values of Fixed O&M costs Over the project life time. Note 3: Every 5 years, the cost of periodic maintenance is added to the Variable O&M costs, but with taking into consideration an escalation rate (3%) in the cost of the periodic maintenance from the base year (2009) to the year of calculation.

Operation & Maintenance Costs

Financial Cost Benefit Analysis: Note 4: It will be no periodic maintenance costs added in the 25th year of commissioning, because it will be total rehabilitation in the 2 gas turbines at that year.

Operation & Maintenance Costs

Financial Cost Benefit Analysis: Column (H) This column represent the Total O&M costs (million $) costs for each year over the project life time in (million $). Total O&M costs (million $) = Fixed O&M costs (million $) + Variable O&M costs (million $)

Operation & Maintenance Costs

Economical Cost Benefit Analysis: The financial cost Benefit analysis uses the market prices for representing both values of Fixed & Variable O&M costs So, that market prices are needed to be converted to its relative real prices to be suitable for the Economical cost Benefit analysis which can be done by using the following assumptions.

Operation & Maintenance Costs

Economical Cost Benefit Analysis:

Fixed O&M costs

According to the definition of : It is the wages and salaries of the all workers in the power plant. The economic costs benefit analysis assumes that the workers of the power plant are not treated by the same way and the skilled worker is different from the unskilled workers and they both different from the administrators

Operation & Maintenance Costs

Economical Cost Benefit Analysis:

So
The values of the Fixed O&M Cost ($/KW) is divided into 3 unequal components: skilled workers (60 % of total fixed O&M cost) unskilled workers (30 % of total fixed O&M cost) Administrators (10 % of total fixed O&M cost)

Operation & Maintenance Costs

Economical Cost Benefit Analysis: Multiply each component in its relative appropriate account ratio. Account Ratio: It is a relative magnitude which used in converting the market prices of a goods or services to its the real prices.

= (Real price / Market price)

skilled workers (account ratio = 2 or 4) unskilled workers (account ratio = 1) Administrators (account ratio = 1)

Operation & Maintenance Costs

Economical Cost Benefit Analysis:

Variable O&M costs

It represents the incremental operations and maintenance costs incurred upon increasing the level of production by one unit. To convert the Variable O&M costs ($/MWH) to its real prices it is multiplied in its a relative account ratio. Account ratio For Variable O&M Costs = 0.97 %

Operation & Maintenance Costs

Economical Cost Benefit Analysis:

Operation & Maintenance Costs

Economical Cost Benefit Analysis: Column (D) This column represents the total installed capacity (MW) of the power plant, which assumed in the ideal case to be fixed over the project life time Column (F) This column represents the total energy generated (GWH) from the power plant at specific capacity factor Total Energy generated per year (GWH) = Total installed capacity (MW) * number of hours per year * capacity factor (%)

Operation & Maintenance Costs

Economical Cost Benefit Analysis:

Column (G, H, I, J& K) Those 5 columns represent the calculation of the Fixed O&M costs in the Economical Cost Benefit analysis.

Operation & Maintenance Costs

Economical Cost Benefit Analysis: Column (G) This column represents the share of the skilled workers costs (M$) which equal to (60%) from the total Fixed O&M costs over the project life time. The costs of the skilled workers at year 2013 (M$) = Fixed O&M costs at year 2013 ($/KW) * 60% * total Capacity (MW)* 60 %

Operation & Maintenance Costs

Economical Cost Benefit Analysis: Note 1: (For Year 2013) The Value of Fixed O&M costs ($/KW/yr) year 2013 is the escalated value of Fixed O&M costs ($/KW/yr) at the base year 2009 (With escalation Rate 3%). Note 2: The costs of the Skilled Workers in the economical cost benefit analysis is considered to be fixed in all years over the power plant life time and equal to the costs of the skilled workers at the year of commission.

Operation & Maintenance Costs

Economical Cost Benefit Analysis: Column (H) This column represents the account ration (2) which is required to convert the salaries and wages of the Skilled Workers from its market values to its relative real values.

Operation & Maintenance Costs

Economical Cost Benefit Analysis: Column (I) This column represents the share of the unskilled workers costs (M$) which equal to (30%) from the total Fixed O&M costs over the project life time. The costs of the unskilled workers at year 2013 =Fixed O&M costs at year 2013 ($/KW)* total Capacity (MW)* 30%

Operation & Maintenance Costs

Economical Cost Benefit Analysis: Note 1: (For Year 2013) The Value of Fixed O&M costs ($/KW/yr) year 2013 is the escalated value of Fixed O&M costs ($/KW/yr) at the base year 2009 (With escalation Rate 3%). Note 2: The costs of the Un Skilled Workers in the economical cost benefit analysis is considered to be fixed in all years over the power plant life time and equal to the costs of the Un skilled workers at the year of commission and that is for

Operation & Maintenance Costs

Economical Cost Benefit Analysis: Note 3: The account ratio of the for the conversion of costs of the Unskilled workers from its market prices to its real prices is assumed to be (1)

Operation & Maintenance Costs

Economical Cost Benefit Analysis: Column (J) This column represents the share of the administrator costs (M$) which equal to (10%) from the total Fixed O&M costs over the project life time. The costs of the administrator at year 2013 =Fixed O&M costs at year 2013 ($/KW)* total Capacity (MW)* 10%

Operation & Maintenance Costs

Economical Cost Benefit Analysis: Note 1: (For Year 2013) The Value of Fixed O&M costs ($/KW/yr) year 2013 is the escalated value of Fixed O&M costs ($/KW/yr) at the base year 2009 (With escalation Rate 3%). Note 2: The costs of the administrators in the economical cost benefit analysis is considered to be fixed in all years over the power plant life time and equal to the costs of the administrators at the year of commission.

Operation & Maintenance Costs

Economical Cost Benefit Analysis: Note 3: The account ratio of the for the conversion of costs of the Unskilled workers from its market prices to its real prices is assumed to be (1)

Operation & Maintenance Costs

Economical Cost Benefit Analysis: Column (M) This column represents the total economical Fixed O&M costs. = [Skilled workers costs (M$) * account ratio of Skilled workers costs (%)]

+ +

Un Skilled workers costs (M$) administrators Costs (M$)

Operation & Maintenance Costs

Economical Cost Benefit Analysis: Column (L&M) Those 2 columns represent the calculation of the Variable O&M costs in the Economical Cost Benefit analysis.

Operation & Maintenance Costs

Economical Cost Benefit Analysis: Column (L) This column represents the Variable O&M costs in its real prices (M$) over the power plant life time.

Variable O&M costs (million $) = Variable O&M costs ($/MWh) * Total generated energy (GWh) / 1000

Operation & Maintenance Costs

Economical Cost Benefit Analysis: Note 1: (For Year 2013) The Value of Variable O&M costs ($/KW/yr) year 2013 is the escalated value of Variable O&M costs ($/KW/yr) at the base year 2009 (With escalation Rate 3%). Note 2: The costs of the Variable O&M costs in the economical cost benefit analysis is considered to be fixed in all years over the power plant life time and equal to the costs of the Variable O&M costs at the year of commission.

Operation & Maintenance Costs

Economical Cost Benefit Analysis: Note 3: Every 5 years, the cost of periodic maintenance is added to the Variable O&M costs, except for the year of the total rehabilitation of the 2 gas turbines. Note 4: The costs of the periodic maintenance, which added every 5 years, is considered to be constant over the power plant life time.

Operation & Maintenance Costs

Economical Cost Benefit Analysis: Column (M) This column represents the account ration (0.97) which is required to convert the Variable O&M costs from its market values to its relative real values.

Operation & Maintenance Costs

Economical Cost Benefit Analysis: Column (N) This column represents the total Variable O&M costs in its real values. = [Variable O&M costs (M$) * account ratio of Variable O&M costs (%)]

Operation & Maintenance Costs

Economical Cost Benefit Analysis: Column (O) This column represents the total O&M costs (M$) for each year over the project period life time. = Total Fixed O&M costs (M$) + Total Variable O&M costs (M$)

Fuel Costs

Fuel Costs
It is the costs related to the fuel consumption process which is required for the generation of electrical energy from the power plant. Required items for fuel costs calculation: Power plant heat rate Fuel calorific value (Heat content) Fuel Price ($/MMBTU)

Fuel Costs
Power plant heat rate It is the total amount of heat energy needed by all units in the power plant to produce one unit of electrical energy. (BTU/KWh) How to calculate the total heat rate for a combined cycle power plant

The combined cycle power plant consists of 2 gas turbines and 1 steam turbine. The fuel consumption occurs in the 2 gas turbines, where the steam turbine depends on the hot exhausted gas from the gas turbine in generating the electrical energy.

Fuel Costs
Assume the heat rate of one gas turbine is (1000 BTU/KWH). It means that The amount of heat energy needed by the gas turbine is (1000 BTU) to produce one (KWH) of electrical energy So, if the power plant works with this gas turbine only Then, One gas turbine heat rate 1000 BTU/KWH Total power plant heat rate 1000 BTU/KWH

Fuel Costs
If the power plant works with 2 gas turbines ,where the heat rate of each one is (1000 /KWH) So, One gas turbine heat rate 1000 BTU/KWH

Two gas turbine heat rate 2 * 1000 BTU/ 2 KWH Two gas turbine heat rate 1000 BTU/KWH Then, Total power plant heat rate 1000 BTU/KWH

Fuel Costs
when the power plant works with 2 gas turbines and one steam turbine ,where the steam turbine does not consumes any additional amount of fuel but it depends on the exhausted gas from the 2 gas turbines to generate electrical energy. So, One gas turbine heat rate 1000 BTU/KWH Two gas turbine heat rate 1000 BTU/KWH

2 gas turbine & 1 steam turbine heat rate 2* 1000 BTU/ 3 KWH 2 gas turbine & 1 steam turbine heat rate (2/3)*1000 BTU/KWH

Fuel Costs
Then, Total power plant heat rate (2/3) * 1000 BTU/KWH Total power plant heat rate 666.6 BTU/KWH It means that, The total amount of heat energy needed by the combined cycle power plant is (666.6 BTU) to produce one (KWH) of electrical energy

Fuel Costs
Fuel calorific value (Heat content)

The calories or the thermal units contained in one unit of fuel and released when that fuel is burned. (BTU/m3) The combined cycle power plant it can work with 2 types of fuel: (Natural Gas) as the main type of fuel. (Solar) as the secondary fuel type in case of unavailability of natural gas .

Fuel Costs
Financial Cost Benefit Analysis:

Fuel Costs
Financial Cost Benefit Analysis: Column (D) This column represents the total generated energy (GWh) from the power plant over the project life time.

Fuel Costs
Financial Cost Benefit Analysis: Column (E) This column represents the total heat rate of the power plant (BTU/KWh) over the project life time. Note 1: The total heat rate of the power plant increases over the project life time due to aging and depreciation.

Fuel Costs
Financial Cost Benefit Analysis: Note 2: After each 5 years, the total heat rate of the power plant is reduces with small value due to the periodic maintenance of the power plant. Note 3: The changing in the heat rate of the power plant over project life time, can be provided from the manufacturer of the power plant or from a historical data for other combined cycle power plants in the electrical grid.

Fuel Costs
Financial Cost Benefit Analysis:

Column (F&G)

This 2 columns represent the prices of (Natural gas) and (Solar) in ($/MMBTU) over the power plant life time.

Fuel Costs
Financial Cost Benefit Analysis: Note: In the Financial analysis the represented fuel prices over the project life time is considered to be the fuel market prices, which can be taken according to: An agreement between the ministry of electricity and the fuel supplier By making escalation in the first year fuel price with suitable and realistic escalation rate.

Fuel Costs
Financial Cost Benefit Analysis: Column (H) This column represents the total fuel costs of the power plant in (million $) over the project life time. The total fuel costs (M$) = The Natural gas costs (M$) + The Solar costs (M$)

Fuel Costs
Financial Cost Benefit Analysis: Note:

The main fuel type (Natural gas) is considered to be representing 95% in the total fuel costs. The secondary fuel type (Solar) is considered to be representing 5% in the total fuel costs.

Fuel Costs
Financial Cost Benefit Analysis: Then, The Natural gas costs (M$) =Energy Generated (MWh) * Power Plant Heat Rate (MMBTU/MWh)* Natural Gas Price ($/MMBTU)* 95% The Solar costs (M$) =Energy Generated (MWh) * Power Plant Heat Rate (MMBTU/MWh)* Solar Price ($/MMBTU)* 5% The total fuel costs (M$) = The Natural gas costs (M$) + The Solar costs (M$)

Fuel Costs
Economical Cost Benefit Analysis: The representing of fuel costs in the economical analysis for the over the project life time is done by the same methodology of representing the fuel costs in the financial analysis. except that, In the economical analysis the fuel prices is entered in its real prices.

Project Revenue

This part represents the revenues from selling the electrical energy generated from the power plant in the cash flow analysis.

Project Revenue
Financial Cost Benefit Analysis:

Project Revenue
Financial Cost Benefit Analysis: Column (C) This column represents the total generated energy (GWh) from the power plant over the project life time.

Project Revenue
Financial Cost Benefit Analysis: Column (D) This column represents the market prices for selling the generated energy ($/KWh), which will be used by the company that owns the power plant over the power plant lifetime.

Project Revenue
Financial Cost Benefit Analysis: Column (D) The Market prices for selling the electrical energy can be chosen according to : energy selling agreement of the ministry of electricity by making escalation in the base year selling price of the generating company which owns the power plant.

Project Revenue
Financial Cost Benefit Analysis: The Market prices for selling the electrical energy can be chosen according to : An energy selling agreement set by the generating company which owns the power plant. By making escalation in the base year selling price of the generating company which owns the power plant with asuitable escalation rate.

Project Revenue
Financial Cost Benefit Analysis: Column (E) This column represents the total revenue from the combined cycle power plant (million $) which can be calculated by, The total revenue (million $) = Energy Generated (KWh)* average system price ($/Kwh)

Project Revenue
Economical Cost Benefit Analysis: The economical cost benefit analysis uses the same calculating methodology of the financial cost benefit analysis, except that the selling prices is taken as: or the Long run marginal cost of electrical energy Export selling prices The willingness to pay prices: The maximum amount of money a person would be willing to pay, in order to receive the required electrical energy. The Long run marginal cost of electrical energy

Income statement
Income statement (also referred to as profit and loss statement P&L), It indicates how the costs money spent to generate electrical energy the revenues money received from the sale of the electrical energy

transformed into The net income the result after expenses have been deducted from revenues

Income statement
Financial Cost Benefit Analysis:

Income statement
Financial Cost Benefit Analysis: Column (C) This column represents the revenues (million $) from selling the energy generated from the combined cycle power plant. Column (D) This column represents total O&M costs (million $).

Income statement
Financial Cost Benefit Analysis: Column (E) This column represents total Fuel costs (million $). Column (F) This column represents the depreciation (million $) of the combined cycle power plant.

Income statement
Financial Cost Benefit Analysis: Depreciation in the cost benefit analysis is considered as the allocation of the cost of assets to the period in which the assets are used. Depreciation value of a fixed asset over the asset life time =[Total capital cost of the fixed asset (million $) / asset life time (years)]

Income statement
Financial Cost Benefit Analysis: The combined cycle power plant, consists of 2 gas turbines and one steam turbine, where the 2 gas turbines are replaced after 25 years from the year of commissioning of the power plant, so the depreciation can be calculated as, For the first 25 years: [CCGT capital cost (million $) with (IDC) gas turbines capital cost (million $) / 40] + [gas turbines capital cost (million $) / 25]

Income statement
Financial Cost Benefit Analysis: For the last 15 years: [CCGT capital cost (million $) with (IDC) gas turbines capital cost (million $) / 40] + [gas turbines capital cost (million $) / 15] With taking into consideration that the gas turbines capital cost used for the last 15 years is the escalated value of the gas turbines for 25 years from the base year.

Income statement
Financial Cost Benefit Analysis: Column (G) This column represents the taxable income (million $) over the project life time. Definition: It is the amount of income that is used to calculate the power plant income tax due. Taxable income is adjusted calculated after adjustment by deducting all costs from the power plant revenue. Taxable income (million $) = Revenues O&M costs Fuel costs Depreciation

Income statement
Financial Cost Benefit Analysis: Depreciation is assumed to be represented in the cash flow analysis according to the concept of allocation of the cost of assets to periods in which the assets are used It means that The annual depreciation values will be treated as an annual required amount of money deducted from the revenues over the power plant lifetime to allocate adequate amount of money equal to the capital cost of the power plant at the end of the power plant lifetime.

Income statement
Financial Cost Benefit Analysis: According to the following reasons the taxes is applied to the income after adjusting costs from revenues. depreciation as the previous concept can not be treated as a pure revenue. So, The depreciation is deducted from the revenues to calculate the taxable income.

Income statement
Financial Cost Benefit Analysis: Column (H) This column represents the amount of taxes required from the combined cycle power plant for each year over the project life time. Taxes (million $) =Taxable income (million $) * tax rate (%) Tax rate has been assumed to be (20%).

Income statement
Financial Cost Benefit Analysis: Column (I) This column represents the net income from the power plant for each year over the project life time which can be calculated by, Net Income (million $) = Taxable Income Taxes

Income statement
Economical Cost Benefit Analysis:

Income statement
Economical Cost Benefit Analysis: the economical cost benefit analysis is done from the country point of view, so the taxes is considered as a sharing of resources and are not applied to the revenues from selling the generated electrical energy from the power plant. Then, there is no requirement in the economical analysis to calculate the annual values of depreciation or deduct it annually from the revenues to estimate the taxable income, where the net income is calculated directly by, Net Income (million$) = Revenues O&M expenses Fuel expenses

Internal rate of return

The last sheet of the project includes the calculation of the Net Present Value (NPV) and the internal rate of return (IRR) of the net profit. Definition of (IRR) It is the discount rate which makes the net present value of all cash flows (both positive and negative) from a particular investment equal to zero. So, This part will represent all negative cash flow (costs) and positive cash flow (revenues) to calculate the power plant (IRR).

Internal rate of return

Financial Cost Benefit Analysis:

Internal rate of return

Financial Cost Benefit Analysis: Column (B) This column represents the years of construction and the years of operation of the power plant.

Internal rate of return

Financial Cost Benefit Analysis: Column (C) This column represents the payments of capital costs during the construction period (assumed to be 5 years) of the power plant. This column represents also the cost of rehabilitation of the 2 gas turbine after 25 years from the commissioning date of the project.

Internal rate of return

Financial Cost Benefit Analysis: Column (D) This column represents the annual depreciation values over the project life time, which calculated by the same way used in the Income statement. Column (E) This column represents the net income from the power plant which calculated in the income statement after applying the taxes to the taxable income.

Internal rate of return

Financial Cost Benefit Analysis: Column (F) This column represents the net profit over the power plant life time. Net profit =Net income + Depreciation Capital cost The IRR is calculated for the net profit of the power plant.

Internal rate of return

Economical Cost Benefit Analysis: The economical cost benefit analysis uses the same methodology of calculation that used in the financial costs benefit analysis except that in the economical cost benefit the annual depreciation is not calculated so the Net profit is calculated by, Net profit =Net income Capital cost

Dept Service
It is the amount of money required to be paid on a loan in the form of principal & interest repayments over a period of time.

principal repayments

Interest expenses

Interests During construction

Dept Service
Principle Repayments: Interest expenses: Interest During Construction: It is the interests that accumulate during the construction period on a loan that finances the construction process of a building or a project

Dept Service
Interest During Construction: It is the interests that accumulate during the construction period on a loan that finances the construction process of a building or a project Example: Let us assume a company needs to begin a new project requires (1500 million $) total capital cost. The company will finance that project by taking a long term loan from a specific Bank as installments throughout the construction period of the project (4 years)

Dept Service Payments & interest rate

Installments Interest rate Year (1) Year (2) Year (3) Year (4) 150 400 500 450 2.1% 3% 4.5% 1.5%

The Interest during Construction (IDC) = (150 * 2.1%) + (400 * 3%) + (500 * 4.5%) + (450 * 1.5%) = 3.15 + 12 + 22.5 + 6.75 = 44.4 million $

Dept Service
Financial Cost Benefit Analysis: Representation of Dept Service in the financial cost-benefit analysis changes according to 3 Cases Case 3 Capitalization of IDC

Case 1 Un Leverage IRR

Case 2 Leverage IRR

Dept Service
Financial Cost Benefit Analysis: (Case 1: Un leveraged IRR) It is calculated Before the financing decisions are made, where the capital cost of the power plant is assumed to be all equity funded. For this type of IRR the cash flow stream is assumed to be with no debt service (principle repayments, interest expenses & interests during construction)

Dept Service
Financial Cost Benefit Analysis: (Case 2: leveraged IRR) It is calculated, When the financing decisions are made and it is decided to fund the project with some leverage (loans). For this type of IRR the cash flow stream reflects the actual Capital Structure with all Dept Service components (principle repayments, interest expenses & interests during construction)

Dept Service
Financial Cost Benefit Analysis:

Dept Service
Financial Cost Benefit Analysis: (Case 3: Capitalization of IDC) The IDC is a cost for the project; which is calculated only for the years of construction until the project begins to generate revenue, and be able to service its debts. In this case the interests during construction (IDC) is assumed to be added to the capital cost directly.

Dept Service
Economical Cost Benefit Analysis: In the economical cost benefit analysis the capital costs of the project is considered to be provided as a loan from the country it self. This loan does not represent a use of resources like (fuel consumption costs) but only a transfer of resources from the payer to the payee (money inside the country). So even if that loan required dept services (interest repayments, principle repayments or interests during construction) it is not included in the economic analysis

Dept Service Weighted Average Cost of Capital (WACC)

It is the minimum return that a company must earn on an existing project to satisfy its creditors, owners, and other providers of capital. Example: Let assume a capital cost of a project equals to (1500 Million $), which will be financed by a group of loans from different banks.
Bank Name Loan (Million $) Bank (1) Bank (2) Bank (3) 400 600 500

Dept Service Weighted Average Cost of Capital (WACC)

Bank Name Loan (Million $) Bank (1) Bank (2) Bank (3) 400 600 500 Share of loan from Bank Name the capital cost Bank (1) Bank(2) Bank(3) 26.6 % 40 % 33.4 %

Share of the loan of Bank from the total capital cost = [Loan of Bank / Total Capital Cost] Share of the loan of [Bank 1 (400 M$)] from [the total capital cost (1500 M$)] = [400 / 1500] = 26.6 %

Dept Service Weighted Average Cost of Capital (WACC)

Share of loan from Bank Name the capital cost Bank (1) Bank(2) Bank(3) 26.6 % 40 % 33.4 % Bank Name Bank (1) Bank(2) Bank(3) Interest 3% 5% 4%

WACC =

[Share of bank (1) * Interest of bank (1)] + [Share of bank (2) * Interest of bank (2)] + [Share of bank (2) * Interest of bank (2)]

WACC = [26.6 % * 3 %] + [40 % * 5 %] + [33.4 % + 4 %] WACC = 4.1 %

Discount Rate
Financial Cost Benefit Analysis: From the financial point of view the weighted average cost of capital (WACC) is the appropriate discount rate that can be used in discounting the cash flow of the project. Economical Cost Benefit Analysis: In the economical cost-benefit analysis a real discount rate is used for the cash flow.