The accounting-and-finance of a solar photovoltaic plant: Economic efficiency of a replacement project

Magni, Carlo Alberto and Marchioni, Andrea (2019): The accounting-and-finance of a solar photovoltaic plant: Economic efficiency of a replacement project. Published in: 4th International Conference on Energy and Environment: bringing together Engineering and Economics, Guimarães, Portugal

Abstract

In this work we illustrate a simple logical framework serving the purpose of assessing the economic profitability and measuring value creation in a solar photovoltaic (PhV) project and, in general, in a replacement project where the cash-flow stream is nonnegative, with some strictly positive cash flows. We use the projected accounting data to compute the average ROI, building upon Magni (2011, 2019) (see also Magni and Marchioni 2018), which enables retrieving information on the role of the project’s economic efficiency and the role of the project scale on increasing shareholders’ wealth. The average ROI is a genuinely internal measure and does not suffer from the pitfalls of the internal rate of return (IRR), which may be particularly critical in replacement projects such as the purchase of a PhV plant aimed at replacing conventional retail supplies of electricity.

• Item Type: MPRA Paper
• Language: English
• Keywords: Energy project analysis, investment evaluation, value creation.
• Subjects: C - Mathematical and Quantitative Methods > C0 - General > C02 - Mathematical Methods; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C67 - Input-Output Models; G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting ; Fixed Investment and Inventory Studies ; Capacity

References

Brealey RA, Myers S, Allen F 2011. Principles of Corporate Finance, global ed., McGraw-Hill Irwin, Singapore.

Graham, JR, Harvey CR 2001. The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60, 187–243.

Magni CA 2011. Aggregate return on investment and investment decisions: A cash-flow perspective. Engineering Economist, 56 (2), 181–182.

Magni CA 2019 (forthcoming). Investment Decisions and the Logic of Valuation. Linking Finance, Accounting, and Engineering. Springer Nature, Switzerland.

Magni CA, Marchioni A 2018. Project appraisal and the Intrinsic Rate of Return. Proceeding of 4th International Conference on Production Economics and Project Evaluation, ICOPEV, Guimaraes, Portugal, September 20-21, 225-230.

Remer DS, Stokdyk SB, VanDriel M 1993. Survey of project evaluation techniques currently used in industry. International Journal of Production Economics, 32, 103–115.

Remer DS, Nieto AP 1995a. A compendium and comparison of 25 project evaluation techniques. Part 1: Net present value and rate of return methods. International Journal of Production Economics, 42, 79–96.

Remer DS, Nieto AP 1995b. A compendium and comparison of 25 project evaluation techniques. Part 2: Ratio, payback, and accounting methods. International Journal of Production Economics, 42, 101–129.

Ross SA, Westerfield RW, Jordan BD, 2011. Essentials of Corporate Finance, seventh ed. McGraw-Hill/Irwin, New York.

Ryan PA, Ryan GP, 2002. Capital budgeting practice of the Fortune 2000: How have things changed? Journal of Business Management, 8 (4), 355–364. (Fall).