SEDAC ECONOMICS CALCULATOR

SEDAC provides and economic calculator that can provide an initial estimate of whether or not your energy efficiency project makes economic sense over a reasonable payback period.

Energy Project Economics Calculator
* Required Fields
First Cost ($)*
 
Annual Savings ($/year)*
 
Discount Rate (%) *
Life of Measure (years) *
 
Financing Interest Rate (%)
Loan Period (years)
 
Simple Pay Back (years)
Internal Rate of Return (%)
Net Present Value ($)

Note: Annual savings are assumed to incur evenly over the year, and therefore have been discounted on a monthly basis.

How Do I Evaluate an Energy Project?

Energy efficiency improvement projects generally require an investment of capital today in exchange for reduced operational expenses over a period of time in the future. Review of economic indicators can help determine attractiveness and viability of options. This calculator assumes a uniform series of monthly cash flows and no escalation of fuel costs above inflation.

Typically, projects are considered economically attractive if internal rate of return IRR > discount rate and net present value NPV > 0 indicating that the projects add value to the organization. Additionally, other impacts of projects should also be considered including environmental and social impact, increase in facility asset value, comfort and functionality of space, and productivity of occupants. These impacts may be harder to quantify but could override face value economics.

Calculator Parameters

First Cost ($)

$1-$10,000,000 to nearest dollar

Annual Savings ($)

$1-$10,000,000 to nearest dollar

Discount Rate (%)

1-500% to 2 decimal places

Life of Measure (years)

 

Financing Interest Rate (%)

1-25% to 3 decimal places

Loan Period (years)

1-25 years, whole years

Frequently Asked Questions

How Do I Evaluate an Energy Project?

Energy efficiency improvement projects generally require an investment of capital today in exchange for reduced operational expenses over a period of time in the future.

These savings can come in the form of:

  • reduced utility bills
  • reduced energy consumption
  • reduced operations and maintenance costs

Review of economic indicators such as:

  • Net Present Value (NPV) and
  • Internal Rate of Return (IRR) can help you decide if tomorrow's savings is worth today's investment.

Examination of monthly loan payments and cash flows can establish the practical viability of an investment option.

Does the Project Make Economic Sense?

Projects are usually considered attractive if:

  • IRR > discount rate
    The internal rate of return (IRR), or annual yield, is greater than the investor's time value of money (their discount rate). AND
  • NPV > 0
    The net present value (NPV) at the desired rate of return is greater than zero, indicating that the project more than pays for itself.

The discount rate is often set at what an investor can expect to make on an alternate investment.

This calculator assumes a uniform series of monthly cash flows and no escalation of fuel costs above inflation.

GLOSSARY OF TERMS

Discount Rate

This is the investor’s self-determined time value of money expressed as an annual percentage rate. This is the minimum acceptable rate of return required of a project before an investor is willing to invest. It may be set to what an investor can expect to make on an alternate investment. It may be set as the incremental cost of capital. It often may include an investor’s perception of the risk of the particular investment. That is, a higher return may be required for an investment which is perceived to entail more risk. A typical discount rate is 10%, although some have discount rates as high as 25%.

 

Financing Interest Rate

This is the rate at which an investor can borrow capital, usually a bank’s loan interest rate. A typical interest rate is 8-10%.

Internal Rate of Return

This is the annual yield of a project over its expected life, expressed as a percentage of the original investment. IRR is determined iteratively as the interest rate at which the present value of future savings is equal to the original investment, i.e. NPV = 0. In this calculator, IRR is the annualized value for “i” which completes the following equation:


Monthly Net Cash Flow

This is the sum of monthly savings minus the monthly loan payment. A positive net cash flow will result in an accumulation of wealth.

 

Monthly Loan Payment

This is the amount the investor will need to pay monthly for financing the project. In this calculator the monthly loan payment is calculated as follows:


Net Present Value

The sum of immediate and future cash flows converted to today’s dollars. Money received in the future is not worth as much as money held today and is discounted by an investor’s time value of money. Typically if NPV > 0 the investment is attractive. The formula used for NPV in this calculator is as follows:

Project Lifetime

The duration of time that durable equipment will operate satisfactorily and that project changes will still represent a reasonable technical solution. Non-durable equipment, such as lighting luminaries, may need to be replaced periodically during the lifetime of a lighting project. The lifetime of energy investment projects vary. Typically a 5 year life is assumed for personal computers; 10 years for interior lighting, controls, commissioning and kitchen equipment; and 20 years for HVAC equipment and structural changes such as insulation or windows

 

Example Problems

Example 1

Problem:

  • A project will cost $15,000 and save $8089/yr. The investor's discount rate is 10%. The equipment life is 10 years. Is this an attractive investment?
  • The investor will borrow $15,000 at a 7% interest rate for 10 years. What will the monthly loan payment be? What will the monthly net cash flow be?

Answer:

Since IRR>discount rate and NPV>0, this is an attractive investment. Monthly loan payment =174. Monthly net cash flow=$499.

Example 2

Problem:

A hotel owner is planning to retrofit existing T12 fluorescent lights with energy efficient T8 lighting. The project requires an investment of $6,960. Annual electrical savings are expected to be $2,097. The economic life of the new fixtures is assumed to be 10 years. If the investor's required rate of return (discount rate) is 10%, is this project an attractive investment?

Answer:

NPV= $6,263. IRR= 28%. Since NPV > 0 and IRR > discount rate, this is an economically attractive option.

Example 3

Problem:

A building owner is considering replacing his existing boiler with a high efficiency unit. The new equipment will cost $48,000 but save $12,800 per year in natural gas. The boiler is expected to last 20 years. The owner wants a 15% return on the project. He can finance the project for 6.75% if he takes a 5 year loan term.
What is the IRR of the project before financing? What will his monthly net cash flow be during the term of the loan and after the loan is paid off.

Answer:

IRR=26.5%. During the term of the loan monthly cash flow will be a positive= $122. After the loan is paid off savings will accrue at the rate of $1,067/month.

Example 4

Problem:

An investor is constructing a new building. Options for the 1950sf of windows are being considered. Standard double pane windows cost $16/sf. High performance, low emissivity windows cost $21/sf. The high performance windows will result in the building using less energy. The annual savings is $1014. The investor's time value of money is 8%. Either type of window is expected to last 20 years. What is the annual return on upgrading to high performance windows?

Answer:

The incremental cost of the upgrade is $5/sf*1950sf= $9750. This is used as the project cost. IRR= 8.48 %.