Build the feeder, or contract flexibility?
A network planner is comparing a small augmentation with a service contract. The flexibility option looks cheaper, but its assumed delivery and the short study horizon need scrutiny.
Permanent case linkYour task
Compare discounted costs, stress-test service payments and state why a private cost screen is not a completed regulatory investment test.
Your role
Network investment analyst preparing an options screen
Practice data & worked solution
Comparable service, comparable cash flows
Original synthetic three-year screen. Values are A$ million; capex is time zero, annual costs at each year end; discount rate 6%. Both options are assumed to deliver identical service for three years. No residual value, tax, financing, demand growth or outage cost. The zero residual value is deliberately restrictive for a long-lived network asset; test it before any real decision.
| Option | Time-zero cost AUD m | Annual cost AUD m | Years |
|---|---|---|---|
| Build feeder | 5 | 0.1 | 3 |
| Contract flexibility | 0.2 | 1.6 | 3 |
Your analysis
- Calculate present cost of each option and the difference. State the service-equivalence assumption.
- Increase annual flexibility payment to A$2m. Find the break-even annual flexibility payment under the original assumptions.
- Restore the A$1.6m payment and give the feeder a hypothetical A$2m residual value at year three. Recalculate ranking and list evidence needed for a credible option comparison.
Worked solution
Base present costs
The three-year annuity factor at 6% is 2.673012. Feeder present cost is 5 + 0.1 × 2.673012 = A$5.267m. Flexibility costs 0.2 + 1.6 × 2.673012 = A$4.477m, about A$0.790m less. This ranking relies on equal delivered service and no residual value.
Contract-price sensitivity
At A$2m a year, flexibility present cost is A$5.546m, about A$0.279m more than the feeder. Break-even annual payment is (5.267301 − 0.2)/2.673012 = about A$1.896m. Performance failure, rebound and availability obligations could change the effective cost.
Horizon and residual value
A$2m received or valued at year three has present value 2/1.06³ = A$1.679m. Subtracting it gives feeder present cost A$3.588m, below flexibility by A$0.889m. The residual value is an assumption, not a sale offer. Test a common service horizon, residual methods, reliability, demand scenarios and the applicable regulatory benefit framework.
Review your response
- Timing: capex is not discounted as though paid at year end.
- Equivalence: service delivery and performance risk are stated, not assumed silently.
- Sensitivity: contract payment and residual value can both reverse ranking.
- Scope: an investment test considers more than this project's simplified expenditure table.
This checklist supports self-review. No tutor marking or independent credential is included.
Related topics 5
Sources & evidence
All figures are original teaching inputs, not observations or published forecasts. The official source supplies industry context, not this dataset. Source link checked 17 October 2026. Use AER material for network regulation context. A formal proposal additionally needs applicable investment-test requirements, credible options, demand forecasts and service standards.
AER State of the energy market 2025 — network chapters