An energy investment's Simple Payback Period is the amount of time it will take to recover the initial investment in energy savings, dividing initial installed cost by the annual energy cost savings. For example, an "energy-saving" measure that costs $5,000 and saves $2,500 per year has a Simple Payback of $5000 divided by $2500 or 2 years.
Simple Payback | = | Cost | $5,000 | = | 2 years | |
------------ | ------------ | |||||
Savings | $2,500/year |
While Simple Payback is easy to compute, its weakness is that it fails to factor in: the time value of money, inflation, project lifetime or operation, and maintenance costs. To take these factors into account, a more detailed Lifecycle Cost Analysis must be performed. Simple Payback is useful for making "ballpark" estimates of how long it will take to "recoup" an initial investment.