EME 500 Fall 2018

Abdelmoumine Bognini Traore

Problem Set #1: Discounting Projects (MATLAB Practice)

EGEE 451
Revision: Aug 29, 2018
Due: Wednesday, August 29, 2018

Objective: This problem is designed to help you explore the valuation of investment projects,
and compare projects using several alternative criteria. You are required to use MATLAB to
perform the calculations.

Context: PSU is considering purchasing a 2 MW lithium-ion battery for energy storage. This battery
can be used in several different ways:
A) Charge at night and use during the highest price time of day to save electricity costs
B) Sell the services of the battery to PJM, the grid operator in this region, for “regulation”: PJM
would control when the battery charges/discharges to help it balance supply and demand.

In this assignment, you will evaluate these alternative investments for a 10-year period, using a variety
of methods for accounting for the time value of money. For now, we will use average values for all the
parameters as placeholders. In future assignments, we will directly model the uncertainty in some of
these values.

1) Compute Net Present Value of Project A

Assume the following values:

 The capital cost installing of the battery system is $2,000,000.
 The capacity of the battery is 2 MW
 The lowest price when you can charge (usually 4am) is $20/MWh
 The highest price when you will use the stored energy (usually 5pm) is $38/MWh
 You can use the battery 365 days/year, for 10 years.
 Assume a “one-hour” battery: this means you can charge from 0% to 100% (2 MWh) in one
hour, and you can discharge from 100% to 0% (2 MWh) in one hour
 For this assignment, assume that you can charge to 100% and that you can discharge to 0%.

a) How much would Penn State save in one year if it used the battery in this way? Show your
work.

Savamtperyear= ([Capacity of Battery * Discharging time* Highest Price]- [Capacity of Battery *

Discharging time* Lowest Price])*365 days = (2*1*38-2*1*20)*365= 13140 $

b) Create a MATLAB script (call it “hw1.m”) to save all your work. In the script, create a vector
to contain the savings in nominal dollars in each year for 10 years.

See the vector named savector in script

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c) Use the MATLAB function “pvvar()” to calculate the present value of the savings over 10 years,
using a discount rate of 8%.
Saving Present Value = pvsav1 = 8.817*10^4 $

d) If the capital cost is paid at the start (year 0), what is the NPV? Is this project profitable?

NPV = NPV1A= -1.9118*10^6 $

The project is not profitable

e) Do the discounting yourself: create a vector with 10 rows (one for each year) that contains the
discount factor  calculated as:

1
𝛾(𝑡) =
(1 + 𝑟)𝑡

See the vector named discfactor in script

Where r is the discount rate of 8% and t is the year (1-10).

Create another vector that contains the present value of savings in each year, by multiplying the nominal
savings by the discount factor in each year. Calculate the sum of this vector, and compare with the
present value of savings from part c). Are these values the same? Why or why not?

See the vector named savdisc in script

Present value = pvsav2 = -1.9118*10^6 $

Pvsav1=pvsav2 so, the two present values are the same. The present values are the same

f) Calculate the NPV of Project A with a discount rate of zero. Is this project profitable? What
does this tell you?

NPV with 0 discount rate= NPV3A= -1868600 $

2) Compute Net Present Value of Project B

Assume the following additional values:

 Price of selling regulation services to PJM is $35/MWh
 Capacity sold for regulation is 1 MW (1 MW up or 1 MW down).
 Battery can operate 23 hours per day, 365 days per year, for 10 years.

a) What is the revenue in one year from this way of using the battery? Show your work.
Revenue = rev = (Battery capacity sold * running time* price of sale) = 23*1*35 =293825 $

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b) Create a vector to hold 10 years of the annual revenue in nominal dollars. Use pvvar() to
calculate the present value of this stream of revenues at a discount rate of 8%.

See the vector named vecta containing the annual revenues in annual dollars
Present value = pvrev = 1.971*10^6 $

c) Subtract the capital cost from the present value of revenue to get the NPV for Project B. What is
the NPV of this project? Is it profitable?

NPV = NPV1B = -2.841*10^4 $, NOT PROFITABLE

d) Would the project be profitable at a discount rate of 10%? What is the NPV?

NPV = NPV2B = -1.9457* 10^5 $, NOT PROFITABLE

e) Would the project be profitable at a discount rate of 6%? What is the NPV?

NPV = NPV3B= 1.6258 * 10^5 $, PROFITABLE

3) Compare Projects B and C

Suppose PSU is offered the opportunity for Project C as follows:

The same battery as in Project B is rented to Penn State for no up-front cost. The battery is used in the
same way and gets the exact same revenue stream as in Project B. However, the annual rental fee is
$270,000.

a) Create a vector to hold 10 years of the nominal cash flow (revenues minus costs) for Project C.
Calculate the NPV of this project at 8%. Which project has the higher NPV? Explain why.

See the vector named nomcashC in script

NPV = NPVC = 1.5987*10^5 $, Project C has higher NPV than project B. It is due to the fact that the
rental cost is spread over time and is discounted as years pass. In project B, the cost of 2 million dollar is
not discounted.

b) Create vectors for Projects A and B for the nominal cash flows over the 10 years (hint: the
savings/revenues in each year and subtract the capital cost from only the first year).
See the vector named nomcashA in script
See the vector named nomcashB in script

IrrA=-0.3242
IrrB=0.0768
IrrC=inf

Use the irr() function in MATLAB to calculate the internal rate of return for all three projects (A,
B, and C), and include these values in your answers.

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Does the IRR provide useful information about these three projects? Why or why not?
It is hard to compare the IRR because the initial investment in these projects are not the same.

c) Create vectors to contain only the positive cashflow (savings or revenues), and separate vectors
to contain the negative cashflows (costs) in each year when they occur.
Vectors for savings/revenues = see vectors benA, benB, benC
Vectors for costs: see vectors cosA, cosB, cosC

BCA= 0.0441
BCB= 0.9858
BCC= 1.0882

Use these vectors to calculate the Benefit-Cost Ratios for all three projects.
Include these values in your answers.
Use a discount rate of 8%.

Does this change which project is preferred from your answer to part a)? Why or why not?

It does not change my answer to part A because BCC>1 :.ie the benefits of project C are relatively
higher than its costs.

4) Overall Evaluation

Based on all of the information in your answers to Q1-Q3, should Penn State invest in any of these
projects, and if so, which one?

Projects NPV Ben/Cost Irr

A -1911800 0.0441 -0.3242
B -28410 0.9858 0.0768
C 159870 1.0882 inf

Project C is the most profitable of these projects because the NPV is the highest, the B/C is higher than
1, and the internal rate of return is very high.

5) Comparing Different Alternatives

Compare the following investments on the basis of

 Net present value
 Benefit-Cost Ratio
 Internal Rate of Return.
Assume a discount rate of 8%.

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Projects NPV Ben/Cost Irr

I 30.129 1.2008 0.2244
II 24.8178 1.2237 0.1986

Which alternative would you recommend to maximize profits?

Justify your recommendation.

Project I is better because the NPV is higher than project 2

The internal rate of return of project I is also higher
And the B/C ratio of project 1 is almost equal to that of project 2

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