The payback period is one of the oldest measures of
investment performance, but it is not as reliable a measure
of overall performance as is the SIR because it fails to
consider the financial returns of a project after it has
"paid-out." There are two types of payback; simple and
discounted. The simple payback period is the length of
time required for the accumulative cash flow from a project
to become positive without considering the time value of
money. The discounted payback period considers the time
value of money in determining the length of time for the
accumulative cash flow to become positive.

The discounted payback period is recommended as a measurement statistic instead of the simple payback period because it is a more valid indication of performance. This measurement distinguishes between SIR's of similar value and assists in determining the attractiveness of an investment without extensive analysis.

c) BTU Savings/Investment Dollar

The purpose of initiating energy conservation programs
throughout the ERDA system is to conserve energy without im-
pairing the critical needs of facilities. For this reason,
in addition to the strict measures of financial performance,
a measurement of the number of BTU's saved per investment
dollar should also be made. This measure will allow more
consideration for conservation programs at those facilities
with low energy costs. Similar conservation programs saving
the same number of BTU's will not yield equivalent savings/
investment ratios because of differences in the cost of
energy. From the standpoint of nationwide energy conservation,
the BTU Savings/Investment Dollar is considered to be a valid
indicator of investment performance.

The BTU Savings/Investment Dollar is the ratio of the average annual amount of BTU savings divided by the average annual present value of the investment. The average annual present value of the investment is equal to the present value of the investment divided by its economic life (up to 25 years). The ratio is derived using the following formula:

BTU Savings/Dollar Investment=

Annual BTU Savings

(Present Value of Investment Economic Life)

The examples below illustrate each of the three economic measurement statistics which have been discussed.

EXAMPLE✶ ✶

Assume the following:

a) Similar systems will be installed in two ERDA
facilities, A and B.

b)

c)

d)

e)

f)

g)

Each system has an economic life of 15 years and the
cost of the investment is $100.000.

Assume remaining life of existing systems at the respective
sites is also 15 years.

At location A, the investment can save 5.8 billion BTU's
per year but, due to exogenous factors, will save only 5.4
billion BTU's per year at location B.

The subject energy cost at location A is $3.50 per million
BTU's and at location B is $4.50 per million BTU's.

Assume an energy differential escalation rate of 4 percent.
Assume a discount rate of 10 percent.

h) Assume O&M costs are not a factor in this analysis.

Compute the savings/investment ratio, discounted payback period, and BTU Savings/Investment Dollar for each location.

Using a banker's method, calculate the discounted payback

period as shown on Chart II-1.

200,166 100,000

239,608 100,000

2.00

2.40

5 and 24,712/25,686 years*** = 5.96 year payback

4 and 25,022/29,566 years*** = 4.85 year payback

*

Annual savings escalated at rate of 4% each year. The annual savings reduces the outstanding balance.
** Interest calculated at 10% of outstanding investment balance.

***The partial year payout figure is equal to the previous outstanding balance plus interest which is paid out of annual savings. The ratio of these two numbers is the percentage of year completed at time of payout.

Location A

This is calculated using the formula previously shown.
5,800,000,000 BTU's Saved Annually
$100,000+ 15 year economic life
5,400,000,000 BTU's Saved Annually
$100,000 15 year economic life

Location B=

870,000

=

810,000

B.

Example Summary

The results of the analysis show that the opportunities are cost-effective in each location because the SIR is greater than 1.0 in each case. From the standpoint of cost-effectiveness the installation at location B is superior because it yields an SIR of 2.40 versus 2.00 at location A. However, the facility at location A will save more energy than at location B, 870,000 Btu's versus 810.000 Btu's respectively. From the standpoint of payout, the opportunity at location A will take 5.96 years to payout while at location B the project will payout in only 4.85 years. In essence, if available funds limited the selection to only one project, site 'B' would be retrofitted, all other judgement factors held equal. This decision might be tempered if the BTU's saved at site 'A' were based on natural gas and the BTU's saved at site 'B' were based on coal.

The economic analyses recommended in this guidebook utilize two review levels. These levels are a nomogram conversion to SIR and a primary project analysis technique. In either analysis level, support worksheets which describe the basis for energy and cost savings should accompany the Life Cycle Costing documentation forwarded to ERDA.

The nomogram is utilized in all initial reviews of energy conservation life cycle benefits. The nomogram is useful in all replacement analyses, all new construction analyses, and in prioritization of competing alternatives. It has been developed to determine the discounted payback period of items which have simple disbursement and receipt conditions. In association with Appendix E, Table 1, it provides SIR calculations in a rapid fashion. The facility engineer can determine if the project should be considered further or discarded through this process.

If certain criteria are not met, the nomogram results are more carefully documented utilizing the primary project analysis technique. This analysis format and methodology presents the major criteria influencing complex projects and, together with the nomogram and supporting documentation, allows ERDA to review competing projects on a comparable basis. This life cycle primary project analysis technique should accompany budget requirements meeting the criteria shown in Chart II-2. Basically, projects which exceed $25,000 in capital funds or where