Calculation parameters

The calculation parameters are to be determined in consultation with the property owner.

Inflation

The general rate of inflation has a major impact on the requirements on suppliers and property owners for returns on equity investment capital.  The Bank of Sweden has a range of measures that are intended to restrict inflation.

Cost of capital

The nominal cost of capital is used for calculating where incoming and outgoing payments refer to current prices. The real cost of capital must be used for calculations of fixed prices, i.e. calculations without the effects of inflation. The cost of capital must reflect the funding of the project (loans or own funds) and normally also a risk premium. The choice of a nominal or real cost of capital does not affect the results of the profitability calculations, however, it is important that they are used in the correct way and above all are explicitly specified.
 At a nominal cost of capital of 6 % and an inflation rate of 2 %, the real cost of capital will be around 4 % - see the Excel file in the Documents section.

Service life and time horizon

The technical (physical) service life is determined by the time it takes for a component to be physically worn out and thereby unusable. This service life is determined initially in connection with scrapping.
The economic service life of a component is normally shorter than the technical life and is determined by the increasing operational inferiority it has when compared to new components. When talking about profitability calculations, it is the economic service life that is being referred to. The economic service life of a system is affected by the maintenance investments and replacement times for components included in the system. The complexity of these issues results in the need of a simplified handling procedure, by way of a suggestion 10/20/30/40 years. The time horizon is equal to the quantifiable calculation period. This is proposed to be set at a maximum of 40 years. No financial residual values are then assumed, i.e. neither costs nor income after this time are assumed to have any financial significance.

Sensitivity analysis

How sensitive are my calculation results for the assumptions made, in particular in relation to investment costs
and savings? Where is the break-even point, for example, as regards energy price (= savings cost), cost of capital (= internal rate of return) etc.