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Simple Payback Analysis Method

Simple payback is common economic analysis method and is understood by most business owners. Simple payback is the amount of time it will take to recover installation costs based on annual energy cost savings. The equation for simple payback is annual energy cost savings per year divided by the initial installation cost.

For example, if a recommendation cost $5,000 to install and will save $2,500 per year, then the simple payback is 5,000 divided by 2,500 or 2.0 years. Note that this calculation does not consider the time value of money, inflation or maintenance costs. To take these factors into account, use a life cycle cost analysis.

If two different lighting projects have different economic "lives," then do not use simple payback to compare the two. Simple payback won't provide information about a project's profitability; only how long it takes to recoup the investment. However, a simple payback of two years or less usually suggests a profitable project. A longer simple payback requires more study.

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