Payback Versus Return On Investment

Engineers (and to some extent, architects) are often unable to present economic information to higher-level decision-makers who prefer to speak the language of business, not design. A good example occurs in the world of energy savings. For example, suppose it cost $300,000 extra to secure annual energy savings of $100,000. This is a typical circumstance. An engineer might say that this measure has a "3-year payback" ($300,000/$100,000), in terms of how long it takes to recover the initial investment from the annual energy cost reduction. (This is what they remembered from the one course in "engineering economics" they had to take in college.) A more business-oriented person would say that this measure has a "33 percent, inflation-protected return on investment," because payback is measured in terms of today's energy costs, which are quite likely to increase in the future. Which approach sounds more inviting—waiting 3 years just to get your money back, or making a very high-return investment? Both use the same data, but one is more likely to get approval, don't you think?

Let's take the same situation into the world of commercial real estate. Commercial properties are typically valued as a multiple of "net operating income," typically determined by dividing the income by a capitalization rate expressed as a percentage (think of how a corporate bond is valued; it's the same approach). If I reduce annual energy costs by $100,000, a typical "cap rate" of 6 percent would yield an incremental increase in value of $1.67 million ($100,000/0.06). So the same investment in energy efficiency (in a commercial situation) would create a 566 percent immediate return on investment ($1,667,000/$300,000)! Quite a difference, don't you think, between a 33 percent return on investment (which of course sounds pretty good) and a 533 percent immediate increase in value! If engineers and architects learned how their clients make and talk about money, it would make it far easier to "sell" sustainable design investments for many projects. Again, the basic message is that design and construction professionals need to get out of their "comfort zone," to become more effective advocates for high-performance buildings.

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Renewable Energy Eco Friendly

Renewable Energy Eco Friendly

Renewable energy is energy that is generated from sunlight, rain, tides, geothermal heat and wind. These sources are naturally and constantly replenished, which is why they are deemed as renewable.

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