Simple Payback: The Wrong Tool for Energy Project Analysis?

Abstract

Industrial decision-makers everywhere depend on "payback" as a way to evaluate proposed investments in their facilities. Compared to more sophisticated financial measures such as net present value and internal rate of return, payback is comparatively simple to understand and calculate — perfect for "back of the envelope" analysis. But its inherent simplicity also creates problems. As a managerial decision tool, payback remains grossly inexact and misapplied, especially when thousands or even millions of dollars are at stake. As this article explains, the “save-or-buy” calculation provides a better way.