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Payback Period Example 1

A CPD Grantee is providing HOME funds to Helping Hands Nonprofit to rehabilitate Main Street Apartments. The apartment's furnace is broken and needs to be replaced. Currently, the annual energy costs for the existing furnace is $1,800. Helping Hands wants to assess whether to replace the existing furnace with an energy efficient model. They have determined that the annual energy cost for the new energy efficient furnace is $1,500. The cost of purchasing a new high efficiency furnace is about $3,000. The cost of an inefficient furnace is $1,000.

To calculate the payback, use the following formulas:

First Cost
=
Incremental cost of purchasing the new furnace
=
Cost of high efficiency furnace - Cost of inefficient furnace
=
$3,000 - $1,000
=
$2,000
     
Annual Savings
=
Annual Energy Cost Existing Furnace - Annual Energy Cost of New Furnace
=
$1,800 - $1,500
=
$300
     
Payback Period
=
First Cost / Annual Savings
=
$2,000 / $300
=
6.7 years

Let's walk through this together:

  • Annual Cost of Existing Furnace = $1,800
  • Annual Cost of New Furnace = $1,500
  • The incremental first cost is estimated to be $2,000.

In this example, the annual energy savings of $300 will pay for the incremental cost of the new furnace in 6.7 years. Therefore, the purchase of the energy efficient furnace is justifiable.