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Other Methods of Cost Effectiveness

There are a number of other methods and software that can be used by grantees/owners to assess cost effectiveness of an energy efficiency method. Although not as commonly used as the payback period calculation, these methods are used throughout the industry.

Three of these methods are described below.

    1. Net Present Value
      Net present value (NPV) is the future cost and benefits of a project measured in today's dollars. It is important to note that costs such as maintenance or replacement if equipment or parts may vary each year. To calculate NPV, future costs and benefits need to be discounted using a reasonable inflation rate.

      When using this criteria, the general rule of thumb is to select projects with a NPV of zero or greater.

      An advantage of NPV is that it focuses on the result. A disadvantage is that there is no account for scale and that it does not calculate when the cost savings will occur. Therefore, it is a good idea to also calculate the payback period when estimating NPV.

    2. Rate of Return/Return on Investment
      Return on Investment (ROI) is the percentage of the investment that is paid back each year. For instance, a $100,000 project that saves $50,000 each year has a 50 percent return on investment. A 10 percent ROI is a reasonable amount, relative to the other investments made in the CDs, bonds and stock markets. Most energy efficiency projects have an average of 15 percent ROI.

      ROI is often a better indicator than NPV when assessing the cost benefit of an improvement. Although the calculations can be complex, spreadsheets are available which simplify the process.

    3. Lifecycle Cost Analysis
      Lifecycle Cost Analysis evaluates a project's savings and costs over a lifetime. The factors measured are salvage and maintenance savings, and operating, maintenance, replacement and disposal costs. If the Net Present Value of the benefits is greater than costs, the project is considered cost-effective.