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where T is the
number of years that fuel savings will be realized (that is, the useful life of the
geothermal system). This formula can be simplified, however, since ( ) is
very closely approximated by (
t
t
1 p / (1 ) i + +
)
t
1 p i + . Therefore instead of making separate
assumptions about fuel price inflation and the discount rate, the relevant calculation can
be made with a single assumption about the difference between the two. This makes
46
modeling much easier and also points out that the calculations used in the body of the text
are correct if the discount rate equals the rate of increase of fuel prices.
A spreadsheet is available
1
that computes the cumulative PDV of fuel price
savings for each Colgate building studied in this project, using a range of assumptions
about the difference between the fuel price inflation rate and the discount rate. For
example, if fuel prices rise at a rate that is 3 percentage points higher than the discount
rate, the payback period for 92 Broad Street is 18 years; if fuel prices rise at a rate that is
only 1 percentage point higher than the discount rate, the payback period is 21 years. The
following table presents selected payback period calculations; full details are available in
the spreadsheet. The 0% column corresponds to the calculations in Tables 8 and 9.
Table III.1
Payback periods (years) for geothermal investing
Difference between fuel price inflation
rate and discount rate (p i)
Building -1% 0% 1% 3%
68 Broad >100 66 50 36
92 Broad 26 23 21 18
94 Broad 29 25 23 19
118 Broad 30 26 23 19
Sigma Chi 26 23 20 17
88 Hamilton 18 16 15 13
13 East Kendrick 20 18 17 14
1
http://www.colgate.edu/academics/departments/environmentalstudies/studentresearch.html; the
spreadsheet can also be obtained from Professor Robert W. Turner at rturner@colgate.edu .
47
One of the uncertainties about investing in geothermal systems at Colgate is that
the systems will require more electricity use (mainly for pumps), but its unknown how
much more. Obviously, the higher are those future operating costs, the less worthwhile is
the investment in geothermal. If the future operating costs were known, or if Colgate was
comfortable making an assumption about their size, it would be easy to incorporate them
into the analysis: the benefits of future reductions in heating fuel expenditures would be
reduced by the amount of new spending on electricity. Modeling of benefits and costs
could also include assumptions about the rate at which electricity costs would rise
through time, which would probably be different than the rate at which heating fuel costs
will rise.
As discussed in the body of this report, investing in geothermal is likely to yield
several nonmonetary benefits: the good feelings generated by reducing Colgates carbon
emissions, educational benefits, and positive public relations and reputation effects,
which might among other things help in Colgates recruitment and admissions efforts.
While at least some of these benefits might be in principle measured in monetary terms,
their size is unknown. As with operating costs, if the size of these benefits were known or
if Colgate was comfortable making an assumption about their magnitude, it would be
easy to incorporate them into our analysis. They would simply be added to the future fuel
price savings in computing the benefits of investing in geothermal. Assumptions could
also be made about whether these benefits grow over time and, if so, at what rate.
As a starting point for incorporating operating costs and nonmonetary benefits
into the analysis, we point out that if the two exactly offset each other, the previous
analysis is accurate. So, for example, Figures 8 and 9 and Table III.1 are accurate if
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future operating costs just equal the future nonmonetary benefits. We can also recalculate
payback periods based on different assumptions about the relative magnitudes of the
future nonmonetary benefits and operating costs. We do so in two ways: Tables III.2 and
III.3 recalculate the payback periods shown in Table III.1 based on annual nonmonetary
benefits being, respectively, $5000 and $40,000 more than annual operating costs. Table
III.4 shows how large the annual difference between nonmonetary benefits and operating
costs would have to be to make the payback period for each building equal 15 years;
these can be compared other possible expenditures by Colgate, for example the cost of
providing full financial aid to one more student. The spreadsheet referenced earlier
provides the details behind these tables and allows other scenarios to be investigated.
Table III.2
Payback periods (years) for geothermal investing
if annual nonmonetary benefits exceed annual operating costs by $5000
Difference between fuel price inflation
rate and discount rate (p i)
Building -1% 0% 1% 3%
68 Broad 42 38 34 29
92 Broad 21 19 18 16
94 Broad 21 20 18 16
118 Broad 20 18 17 15
Sigma Chi 20 19 17 15
88 Hamilton 9 9 9 8
13 East Kendrick 12 11 11 10
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Table III.3
Payback periods (years) for geothermal investing
if annual nonmonetary benefits exceed annual operating costs by $40,000
Difference between fuel price inflation
rate and discount rate (p i)
Building -1% 0% 1% 3%
68 Broad 10 10 10 10
92 Broad 9 9 9 9
94 Broad 8 8 8 7
118 Broad 7 7 6 6
Sigma Chi 9 8 8 8
88 Hamilton 2 2 2 2
13 East Kendrick 4 4 4 3
50
Table III.4
Amount by which annual nonmonetary benefits have to exceed
annual operating costs in order for a 15-year payback period
Difference between fuel price inflation
rate and discount rate (p i)
Building -1% 0% 1% 3%
68 Broad $23,061 $22,545 $21,978 $20,672
92 Broad $14,218 $12,376 $10,353 $5,692
94 Broad $12,096 $10,835 $9,452 $6,263
118 Broad $9,426 $8,315 $7,087 $4,228
Sigma Chi $12,393 $10,669 $8,777 $4,416
88 Hamilton $658 $228 ($244) ($1,332)
13 East Kendrick $2,024 $1,384 $681 ($940)
Note: numbers in parentheses indicate that the payback period would be 15 years
even if annual operating costs exceeded nonmonetary benefits by that amount.
51
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