Simple Project Payback

Screen an efficiency project using net capital cost and constant net annual savings.

How this calculation works

Simple payback estimates how long constant net annual savings take to recover a project's net initial cost. Enter installed capital cost, a confirmed incentive available at the start, gross annual operating-cost savings and any extra annual maintenance or operating cost. Use one currency throughout. The incentive is subtracted from capital cost, and extra annual costs are subtracted from gross savings before division. An incentive greater than the project cost is outside this model, while zero or negative net savings has no finite payback and is rejected. Results are shown in years and equivalent months. This arithmetic screen ignores financing, discounting, taxes, replacement costs and savings beyond the recovery point; it does not establish project lifetime value or constitute an investment recommendation.

Inputs and units

Installed project capital cost (currency units)
Confirmed one-time incentive (currency units)
Gross annual operating-cost savings (currency units/year)
Extra annual maintenance/operating cost (currency units/year)

Method and formula

Net initial cost = capital − incentive; net annual savings = gross annual savings − extra annual costs; simple payback years = net initial cost/net annual savings.

Worked example

Example inputs

Installed project capital cost: 10000 currency units
Confirmed one-time incentive: 1000 currency units
Gross annual operating-cost savings: 3000 currency units/year
Extra annual maintenance/operating cost: 500 currency units/year

Calculation steps

Subtract the confirmed upfront incentive: net initial cost = 10000 − 1000 = 9000 currency units.
Subtract extra annual costs: net annual savings = 3000 − 500 = 2500 currency units/year.
Calculate simple payback: 9000/2500 = 3.6 years.
Convert to months: 3.6 × 12 = 43.2 months.

Example results

Net initial cost: 9000 currency units
Net annual savings: 2500 currency units/year
Simple payback: 3.6 years
Simple payback: 43.2 months

Example notes

Simple payback omits time value of money, financing, replacements and savings after the payback point

Assumptions

Costs use one consistent currency and annual savings are constant
Incentive is confirmed and available at project start

Limitations

Preliminary arithmetic screen, not an investment recommendation or discounted cash-flow analysis
Does not account for lifetime, degradation, taxes, financing or future price changes

Sources

U.S. DOE: Financing Energy Upgrades, Appendix A: Basic Financial Concepts, Metric 1: simple payback and its limitations