Generally there are two kinds of cash flow; the initial investment as one or more installments, and the savings arising from the investment. This over simplifies the reality of energy management investment.
There are usually other cash flows related to a project. These include the following:
• Capital costs are the costs associated with the design, planning, installation and commissioning of the project; these are usually one-time costs unaffected by inflation or discount rate factors, although, as in the example, installments paid over a period of time will have time costs associated with them.
• Annual cash flows, such as annual savings accruing from a project, occur each year over the life of the project; these include taxes, insurance, equipment leases, energy costs, servicing, maintenance, operating labour, and so on. Increases in any of these costs represent negative cash flows, whereas decreases in the cost represent positive cash flows.
Factors that need to be considered in calculating annual cash flows are:-
• Taxes, using the marginal tax rate applied to positive (i.e. increasing taxes) or negative (i.e. decreasing taxes) cash flows.
• Asset depreciation, the depreciation of plant assets over their life; depreciation is a “paper expense allocation” rather than a real cash flow, and therefore is not included directly in the life cycle cost. However, depreciation is “real expense” in terms of tax calculations, and therefore does have an impact on the tax calculation noted above. For example, if a Rs.10,00,000 asset is depreciated at 20% and the marginal tax rate is 40%, the depreciation would be Rs.200,000 and the tax cash flow would be Rs.80,000 and it is this later amount that would show up in the costing calculation.
• Intermittent cash flows occur sporadically rather than annually during the life of the project, relining a boiler once every five years would be an example.