Payback Period Example 2

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A CPD Grantee is providing HOME funds to ABC Development to rehabilitate Vista Garden Apartments. Although the apartment's furnace is rather old and inefficient, it is still in working condition. Currently, the annual energy costs for the existing furnace is $1,000. ABC Development wants to assess whether to replace the existing furnace with an energy efficient model. They have determined that the annual energy cost for the new energy efficient furnace is $750. The cost of purchasing (and installing) a new inefficient furnace is about $1,200. The cost of purchasing a new high efficiency furnace is about $1,600.

To calculate the payback ABC Development, use the following formulas:

Lets walk through this together:

• Annual Cost of Existing Furnace = $1,000
• Annual Cost of New Furnace = $750
• The incremental first cost is estimated to be $800.

In this example, the annual energy savings of $250 will pay for the incremental cost of the new furnace in 1.6 years.

A financial benefit to the owner occurs if the annual savings exceeds the amortized first cost of the energy efficiency measure. For instance, if an owner is expected to reside in a unit where the new energy-efficient equipment is installed for 8 years, the amortized first cost of the energy efficiency measure over the residence of that person is approximately $145, assuming a 9% interest rate.

The $72 annual cost of the furnace is less than $250 of annual energy savings. Therefore, the purchase of the energy efficient furnace is justifiable.