Calculation models

Pay-off methods  

Pay-off without interest

How many years of savings of an equal size are needed in order to repay an investment? This time is called the pay-off time. Profitability is considered to be achieved if this time is shorter than X years. X is determined by company policies and is usually always considerably shorter than the expected life of the measures.

Pay-off with interest

In this case, the repayment period is extended, as the investment capital is then subject to interest. This method is less usual; the pay-off method is mainly built on simplicity and if interest is to be taken into account the present value methods are usually used instead.

Present value methods

The present value methods are the other major class next to pay-off. Depending on what has been emphasized in the analyses, the methods have been allotted different names. Common to all of them is that future incoming and outgoing payments become net present values using the cost of capital. The total of present values less the investment amount is called the investment's capital value. If the capital value is greater than zero, profitability has been achieved. When calculating in fixed prices, the real cost of capital is used. When calculating in current prices , the nominal cost of capital is used. When ranking the various profitable options, the one with the highest capital value is often selected. 

 LCC - Life Cycle Cost

 A common method in Sweden is LCC Energy used for calculating in particular all the costs - including environmental costs - of all the different components during the life cycle.  When LCC is used for calculating profitability in a considered energy saving option, the zero alternative, i.e. do nothing, is compared with one or several other options. You often thereby refrain from evaluating the environmental costs.

Savings cost

What energy cost/energy price today gives exact profitability (capital value=0) ? If this energy cost, which is called the savings cost, is lower than the current variable energy cost, profitability is achieved. It is then cheaper to save energy than to purchase it.

Annual cost per kWh

The annual cost (annuity) per kWh for investment and operations and maintenance costs is calculated. If this annual cost is lower than the variable energy cost, profitability is achieved. As the annual cost is an inverse of the present value, the annual cost per kWh is the same as the savings cost.

Internal rate of return

What cost of capital makes the investment break even (capital value=0)? This interest is the internal rate of return of the investment. If the internal rate of return is greater than the company's cost of capital for this type of investment, the investment is profitable. When ranking the different profitable options, the one with the highest internal rate of return is often selected.

Cash-flow methods

These methods focus on cash flows and liquidity. If the investment is loan financed with an earmarked loan, the repayments should also be taken into account in the analysis. As the liquidity flow is expressed in current prices, any present value calculations must also be made using the nominal cost of capital.