The Big Payback

It's easy to calculate the benefits of increasing energy efficiency. To calculate simple payback, take the total cost and divide by the annual savings. For example, if an appliance costs $500 and will reduce energy costs $100 per year, then the simple payback is 500/100 or 5 years. Simple payback is the easiest and most commonly performed method. If the simple payback is quick, make the purchase. If the simply payback leaves you wondering, then there is more to consider.

Other considerations include the rising utility costs (2-5%/yr), inflation, interest you could earn if money was left in the bank, loan costs, and increased or decreased maintenance costs. A new project may reduce or increase regular maintenance costs.

Net present value (NPV) is a popular method for considering financial factors beyond the simple payback. It calculates a positive cash flow. This occurs when your annual benefits exceed the annual costs. NPV considers the life expectancy of the item, the cost of money, inflation and other possible factors. SImple payback may take many years, but if you a positive cash flow the purchase makes sense.

The most holistic approach is lifecycle analysis. Here we try to evaluate all costs and savings over the lifetime of the item. Everything from salvage value to disposal costs. This method gives the most accurate analysis. Many are trying to add environmental costs into this approach. Obviously this method requires research and some subjective decisions. Some factors are intangible. Included are things like greenhouse gas reduction, the security of having a brand new item, added comfort, increased home value, etc. A good example is double pane windows. They not only save energy, but also reduce outside noise which may be important, but hard to put a price on.

Confused??? Look at Select Cost Analysis Method , or for great calculators visit Energy Cost Calculators.