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Payback Period Calculation

Introduction

When the computerized method is not readily available, a simplified way of calculating the payback methods is as follows:

Annual Savings = Annual Energy Cost1 Existing - Annual Energy Cost New

Payback Period =       First Cost2
Annual Savings

1 EnergyGuide labels displayed on an increasing number of appliances will help you calculate annual energy cost. To calculate the annual energy cost for a home, you need to know the energy rate in your area that is equivalent to the approximate cost of the fuel (cents per therm or kilowatt-hour) and using that information, find from the table provided on the label the annual energy cost of using specific equipment in a certain property.

2 First Cost is the incremental cost of purchasing the new efficient equipment. The incremental cost is the difference between the cost of the efficient equipment and the cost of the inefficient equipment that would have otherwise been installed. Labor is not included in the first cost since it is a cost that would be incurred regardless of whether the equipment was upgraded or not.

Lets walk through a couple of calculations together.

  • Payback Period Example 1. The furnace in a HUD-assisted 10 unit apartment building has broken. Calculate the payback period of purchasing an energy efficient furnace.
  • Payback Period Example 2. The furnace in a HUD-assisted 15 unit apartment building is working inefficiently. Calculate the payback period of purchasing a new energy efficient unit to replace in existing unit.