Payback Analysis of Energy Proposals

Abstract

Payback analysis of investment proposals is one of the most widely used and often misapplied concepts in industry. Significant shortcomings are inherent to this method, its failure to consider the time value of money and inflationary factors being two. The problem of including the time value of money (to the firm) has been conquered by introducing the concept of discounted payback analysis. Recognizing the need of incorporating inflationary factors into economic analysis and the fact that the energy inflation rate often exceeds the inflation rate of the general economy, this paper develops a technique for including these parameters into payback analysis of energy investments. Included in the development of this method are examples of its correct and incorrect application with regard to energy (savings) related projects. Results are presented, indicating the analyst must be careful in the application of these parameters in calculating a proposal's payback, and in comparing energy related projects to non-energy related projects.