Does the Net Present Value as a Financial Metric Fit Investment in Green Energy Security?

Zbysław Dobrowolski and Grzegorz Drozdowski
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Zbysław Dobrowolski: Institute of Public Affairs, Jagiellonian University, 30-348 Krakow, Poland
Grzegorz Drozdowski: Department of Economics and Finance, Jan Kochanowski University in Kielce, 25-369 Kielce, Poland

Energies, 2022, vol. 15, issue 1, 1-16

Abstract: Surprisingly, little is known whether the net present value (NPV) used as a financial metric in budgeting and investment planning to analyse a projects’ profitability is universal. Meanwhile, the epochal green energy revolution ensuring carbon neutrality through green innovations requires enormous investments, and projects realised must ensure energy security. Therefore, there is a need to reanalyse financial metrics used in financial planning, including NPV. We eliminate this research gap and, based on data from Poland, Romania, Hungary, Croatia, the USA, the United Kingdom, Japan, Israel, and Euro Zone, explain why one may not perceive the currently used NPV formula as a universal financial metric. We show that the variable discount rate influences the time value of money. Therefore, there is a need to redefine the NPV formula. This study makes two main contributions. First, it creates new ground by revisiting the NPV formula in the emerging market context compared to stable economies and contributes to developing business and management theory. Second, we propose and empirically verify the modified NPV formula as a financial metric that considers the situation of energy firms in emerging markets. Thus, this research helps the capital budgeting process, and the modified NPV formula can help provide optimal outcomes in firms, helping to reduce financial risks. Our study contributes to a further contextual diagnosis of business projects and can, in turn, be relevant for other energy sector analyses.

Keywords: carbon neutrality; green innovations; energy efficiency improvements; energy security; net present value; financial indicators (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (10)

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