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If the facility manager wants to manage the project, the next step (moving down the tree) is to evaluate whether the project’s equipment will be needed for long or short-term purposes. If short-term, the “true lease” is logical. If it is a long-term project, in a government facility, the “bond” is likely to be the best option. If the facility is in the private sector, the facility manager should decide whether the project should be on or off the balance sheet. ” If the facility manager wants the project’s assets on the balance sheet, the Net Present Value (or other economic benefit indicator) can help determine which “host-managed” arrangement (loan, capital lease or cash) would be most lucrative.
Like an installment loan, PizzaCo’s lease payments cover the Payments Interest Total Principal Taxable Outstanding Income Tax ATCF $953,757 Net Present Value at 18%: 400,000 —————————————————————————————————————————————— Notes: Annual Lease Payment: MARR = 18% Tax Rate 34% —————————————————————————————————————————————— —————————————————————————————————————————————— -400,000 396,000 396,000 396,000 396,000 660,000 0 400,000 1 1,000,000 400,000 2 1,000,000 400,000 3 1,000,000 400,000 4 1,000,000 400,000 5 1,000,000 -400,000 600,000 204,000 600,000 204,000 600,000 204,000 600,000 204,000 1,000,000 340,000 —————————————————————————————————————————————— EOY Savings Depr.
S Strategic Focus Capital Willing to Commit Proj. Complexity Proj. Reliability Manage or Outsource Long-term Equip. Cash Flow Schedule O M Perf. Conf. Host-managed Arrangements Time Frame long short Govt. or Private Govt. Bond Private Off Balance Sheet On or Off Balance Sheet On Balance Sheet NVP True Lease QUANTITATIVE FACTORS Int. Rate Taxes Cash Flow Timing Loan, Cap. Lease Figure 2-14. Strategic Issues Financing Decision Tree. 46 How to Finance Energy Management Projects Table 2-13. Examples FEDERAL GOVERNMENT Facility Type: Military Installation Location: California Project: Performance Contract including over $40 million in energy efficiency equipment, which saves $7,000,000/year Financial Arrangement: Capital Lease with a 20-year term STATE AND LOCAL GOVERNMENT Facility Type: Local Government-Airport Location: Tulsa, OK Project: Performance Contract including over $4 million in energy efficiency equipment, which saves $380,000/year Financial Arrangement: Municipal Bond with a 20-year term Facility Type: Local Government-Convention Center Location: Kansas City, MO Project: Performance Contract including over $8 million in energy efficiency equipment, which saves over $1 million/year Financial Arrangement: Municipal Lease with a 10-year term Education Facility Type: University Location: New Orleans, LA Project: $8 million in energy-related upgrades Financial Arrangement: Operating Lease (Synthetic) with a 20-year term HEALTH CARE Facility Type: Hospital Location: Memphis, TN Project: $15 million in energy-related upgrades Financial Arrangement: Operating Lease (Synthetic) with a 20-year term A Simple Introduction to Financing Energy Management Projects 47 Working the tree from the top to bottom, the facility manager should assess the project and facility characteristics to decide whether it is strategic to manage the project or outsource.