Simple payback time

Each investment metric has strengths and limitations. For example, the simple payback time indicates the time required to recover the investment, hut it ignores any benefits that may occur after the payback time, so measures offering many years of benefits appear no better than short-lived ones. A common drawback of these investment metrics is that the price of energy must be assumed. If the energy price changes, then the payback time must be recalculated. 

Table 28.14 shows the opportunities for pollution prevention that the U.S. EPA recommended for the plant.12 The opportunity, the type of waste, the possible waste reduction and associated savings, and the implementation cost along with the simple payback time are given in the table. The quantities of waste currently generated by the plant and possible waste reduction depend on the production level of the plant. All values should be considered in that context. 

The performance of a typical ethylene recovery unit is summarized in Table 21.3. The system cost was approximately 550,000, resulting in a simple payback time of less than 8 months. 

Economics of residential fuel cells is more complex. Here the purchase price must be justified with sufficient savings in expenditures for energy over the lifetime of the power system. One method that may be used to evaluate feasibility of residential fuel cell power systems is a simple payback time. This is simply a ratio between purchase price and annual savings in electricity expenditures. The result suggests to the potential user... 

Substituting Equation (10-13) into Equation (10-11), the simple payback time is ... 

For larger installations it is more common, instead of simple payback time, to use a capital recovery factor, CRF, which takes into account the lifetime of the fuel cell system and the interest rate ... 

A load profile of a household may be approximated by a power distribution curve as shown in Table El. The cost of grid electricity is 0.15 per kWh and the price of natural gas is 0.32 per m. Calculate the simple payback time for a fuel cell that is sized to cover the maximum load and compare it with the payback time for a fuel cell that is sized for an average power. The fuel cell cost is 1000 per kW. Fuel cell system efficiency is as shown in Figure 10-7. 

PEM Fuel Cells Theory and Practice Simple payback time ... 

The economics of a fuel cell from the previous example may be improved by either exporting excess electricity back to the grid or utilizing the heat produced by the fuel cell. In the former case the price of electricity exported back to the grid may not be the same as the price of purchased electricity. In that case, the simple payback time is ... 

Assuming that the price of electricity exported back to the grid will be 90% of the electricity purchase price, the simple payback time will be ... 

Simple payback time for combined heat and power generation is ... 

One industrial facility that has done exhaust system retrofit is the Eldec Corporation, an aerospace electronic manufacturer. With the help of the local utility, Eldec implemented a control project to reduce exhaust air by up to 30% for the first shift and 60% for the rest of the time and achieved great savings with one year simple payback. The project closed the exhaust inlets with dampers and controlled the exhaust fan speeds with variable frequency drives (VFD). The exhaust fans are now monitored and controlled by the building direct digital controls (DDC) system to ensure proper operation and save energy. 

A simple graph of net cash flow out of, or in to, the project s account illustrates the way in which the cumulative net cash flow moves over the lifetime of the project, and enables the payback time to be easily seen, as in Figure 3. The payback time may be expressed as less than 3 years , or more precisely, such as 2.4 years or 2 years 5 months. 

Simple Methods for Economic Analysis Payback Time... 

A simple method for estimating the payback time is to divide the total initial capital (fixed capital plus working capital) by the average annual cash flow ... 

Net present value is a more useful economic measure than simple payback and ROI, since it allows for the time value of money and also for annual variation in expenses and revenues. Few large projects are completed in a single year and immediately begin production at full capacity. A more typical startup schedule is given in Table 6.10. Net present value is also a more appropriate method to use when considering after-tax income using an accelerated depreciation method such as MACRS. 

The ratio between the prices of selling products and of raw materials is a subject of debate in an economic analysis. It would be desirable to have an idea about the minimum feasible ratio for given operating costs. A simple measure is the payback time. By applying the Eq. 15.33 we get ... 

Incorporating all the equipment suggested in Table 4.21 in a mixer system costs around GBP 10000 (1997 UK prices). However, due to the significant improvement in process control, this capital investment will have a relatively short payback time. Although the cost of installing an automated control system is approximately twice that for simple on-line monitoring,... 

Some significantly good payback times (1-7 years) have been achieved [14,17,133], mainly with simple and cheap dryers. The chances for the extensive use of high-performance systems may be improved by integrated construction and multipurpose operation. Using modem process control techniques, the efficiency of solar dryers can be increased. Due attention must be paid to system maintenance and training of the operating personnel. 

The NPV concept has substantial advantages compared with simple payback periods or annual rates of return because it accounts for the timing of cash flows over the whole project life and the NPVR can be considered as a calculated investment rate that the profit rate of the in vestment should at least reach. Some shortcomings include the difficulty in selecting the appropriate discount rate and the fact that the NPV does not show the exact profitability of the project. In addition-the same NPV can be obtained from two entirely different cash flow arrays. It should therefore be used in conjunction with thelRR. 

An investment project involves spending an investment (I, in ), and then gaining a return over time. If an energy project is implemented with money spent now, the plant hopes to see a return on investment from a subsequent net energy-saving benefit (B, in /year). The simple payback approach is to calculate the payback time (Pg in years) as... 

When the question is whether a company should invest a project or not, NPV is a stronger metric than simple payback and IRR for making investment decisions. This is because NPV determines the present value of making the investment and not just the amount of time needed to realize the investment. For this reason, NPV has become the most common approach to investment decisions. The IRR approach gets the profit-maximizing answer only if it agrees with NPV. 

In this research, the Desalination Economic Evaluation Program (DEEP) as spreadsheet tool originally developed for the IAEA by General Atomics has been applied to compare the results. Cost flow rates of product, net power product and simple payback period time in each scenario are determined in Table 6. 

Owing to the widespread application of solar hot water systems, a great number of variations of fluid collectors have been developed and commercialized circulation. It is mostly the 1-2 m surface-mounted units that are available commercially these, joined in an appropriate number, form a full collector system. The advantage of commercially available collector surfaces is the quick and simple replacement of the elements and guaranteed thermal efficiency. A disadvantage is the usually high investment cost and the long payback time. For indirect solar dryers, lower cost is involved with panel-type collectors, if the costs... 

The payback period is the time required for the annual earnings to equal the original investment. Payback period is also called payout time, payout period, payoff period, and cash recovery period. Because it is simple and even more understandable than ROI, PBP is widely used in early evaluations to compare alternatives. Like ROI, the payback period in years has several definitions, but the following is used here. This definition is not consistent with the definition of ROI in Eq. (17.7), because only the depreciable capital is used and the annual depreciation, D, is added back to the net earnings because that depreciation is retained by file company. 

High-risk ventures should have payback periods of less than 2 yr. In these times of rapid progress in technology, most companies will not consider a project with a PBP of more than 4 yr. PBP is especially useful for simple equipment replacement problems. For example, should an old, inefficient pump be replaced with a new, energy-efficient model. This decision is clear if the PBP is less than 1 yr. PBP should never be used for final decisions on large projects because it gives no consideration to the period of plant operation after the payback period. 

The payback period is a relatively simple concept. It is defined as the amount of time required to recover its initial project expense. DBP takes the time value of money into consideration by adjusting all futvue cash flows to time zero,... 

---