Application of the Minimum Revenue Requirement - Investment Opportunity Theory to Economic Evaluations with Complex Cash Flows

Application of the Minimum Revenue Requirement - Investment Opportunity Return (MRR¿IOR) Method1 for performing economic comparisons of alternatives in a regulated utility environment is presented in this paper. The procedure for establishing the Investment Opportunity Return (IOR) criterion available to a regulated utility is illustrated, and the methodology for applying the MRR¿IOR theory to complex cash flow problems in which capital investments occur over a number of years is presented. The distinction is made between evaluating essential projects and nonessential or efficiency type projects, with detailed examples of both types of evaluations being given in the paper. The use of sensitivity and risk analyses in performing economic evaluations is also documented.