Simple Payback

The payback period is a useful and simple tool for evaluating the cost-benefit of a certain project and can be easily calculated and understood by most users, depending on the technology. Regarding buildings and building systems, simple payback is generally used for smaller, less costly projects (such as lighting improvements) and simple equipment comparisons (such as air-conditioner units and appliances). The simple payback method does not account for various financial parameters, such as inflation, discount rates, and net present value.

Because innovative products tend to have a higher initial cost than conventional ones, users need to be able to determine the amount of time it will take for an investment to pay for itself. Calculating the payback period for a product or building system can determine, with relative accuracy, at what point the savings accrued from an investment will cover the purchase price. Although simple payback does not account for more complex financial variables, such as inflation, discount rate, and net present value, it does provide one perspective for economic evaluation. The annual savings and life expectancy for a product or system need to be determined before the simple payback calculation can be performed. The example that follows shows how you could use a payback calculation for a lighting project.

These simple examples leave out a lot of elements that are likely to impact your investment. Factors such the escalation rate of energy prices, the inflation rate of the value of money, and maintenance costs are not included in a simple payback calculation. It also does not take into account the nonmonetary value you receive from the more efficient technology. For certain technologies, however, this method is easy to calculate and can provide a relevant measure for economic analysis.