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Chapter 1.6 - Financial Management

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6. Financial Management 6. FINANCIAL MANAGEMENT Syllabus Financial Management: Investment-need, Appraisal and criteria, Financial analysis techniques-Simple pay back period, Return on investment, Net present value, Internal rate of return, Cash flows, Risk and sensitivity analysis; Financing options, Energy performance contracts and role of ESCOs. 6.1 Introduction In the process of energy management, at some stage, investment would be required for reducing the energy consumption of a process or utility. Investment would be required for modifications/retrofitting and for incorporating new technology. It would be prudent to adopt a systematic approach for merit rating of the different investment options vis- -vis the anticipated savings. It is essential to identify the benefits of the proposed measure with reference to not only energy savings but also other associated benefits such as increased productivity, improved product quality etc. The cost involved in the proposed measure should be captured in totality viz. Direct project cost Additional operations and maintenance cost Training of personnel on new technology etc. Based on the above, the investment analysis can be carried out by the techniques explained in the later section of the chapter. 6.2 Investment Need, Appraisal and Criteria To persuade your organization to commit itself to a program of investment in energy efficiency, you need to demonstrate: The size of the energy problem it currently faces The technical and good housekeeping measure available to reduce waste The predicted return on any investment The real returns achieved on particular measures over time. The need for investments in energy conservation can arise under following circumstances For new equipment, process improvements etc. To provide staff training To implement or upgrade the energy information system Criteria Any investment has to be seen as an addition and not as a substitute for having effective management practices for controlling energy consumption throughout your organization. Bureau of Energy Efficiency 139

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