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Moving Beyond Simple Payback

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Presentation of basic financial analysis given at Northeast Campus Sustainability Consortium conference.

Presentation of basic financial analysis given at Northeast Campus Sustainability Consortium conference.

Published in: Technology, Business

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  • Things competing for your money.
  • First (3) years at Prime minus 3% (floor of 2%), remainder of term at VEDA Small Business Loan Program rate
  • Transcript

    • 1. Moving Beyond Simple Payback: The Language of Financial Analysis Richard Donnelly Planning & Development Manager Tim Perrin Business Development
    • 2. Overview
      • Brief Introduction to Efficiency Vermont
      • The College & University Market
      • The Language of Financial Analysis
    • 3. Efficiency Vermont: Who We Are
      • Nation’s first statewide provider of energy efficiency services
      • Created by the Vermont Legislature and Vermont Public Service Board in 2000
      • Competitively-bid, performance-based contract managed by Vermont Energy Investment Corp.
    • 4. Efficiency Vermont: What We Do
      • Technical Assistance & Recommendations
      • Coupled with Economic Analysis
      • Collaborate with Architects / Contractors
      • Provide “Objective Expertise”
      • Financial Incentives & Assistance
    • 5.
      • Through an Energy Efficiency Charge (EEC) on all electric bills
      • Average residential customer ~$2-3 per month
      • Most states have energy efficiency services—typically managed by their electric utility
      • Other programs: charges buried in electric rates
      Efficiency Vermont: How We’re Funded
    • 6. Efficiency Lowers Operating Expenses
    • 7. Efficiency Reduces Carbon Emissions ISO-NE Margin Supply 1 kWh = 1.26 lbs CO2
    • 8. Efficiency: Our most cost-effective energy resource
    • 9.
      • Market Approach to Delivering Services
      • The Role of the College
      • Identifying Barriers
      • Seeking Alignment
      Colleges & Universities Market
    • 10. The Role of College & University
      • 3% . . . 100%
      • Innovation
      • Create future leaders
      • Skills
      • Engage & Build Community
    • 11. Identifying Barriers
      • Lack of awareness
      • Lack of knowledge
      • Competing Priorities
      • Lack of feedback
      • Difficult to make the invisible visible
      • Perceived need for a quick payback
      • Support for efficiency projects hard to obtain
    • 12. Seeking Alignment
      • President’s Office
      • CFO
      • Development & Marketing
      • Students & Faculty
      • Facility Managers
      • Sustainability Coordinators
    • 13. Initial Cost – A Common Barrier
      • Buy now, get paid later
      • Competing resource priorities
      • Instant gratification
      • Not considered an investment
    • 14.
      • Simple payback
      • Return on investment (ROI)
      • Cash flow model
      • Internal rate of return (IRR)
      • Net present value (NPV)
      • Cost of waiting
      Financial Terms
    • 15. Financial Terms – Simple Payback How long will it take to recoup my initial outlay? Initial Cost / Periodic Benefit = Payback Cost = $100, Benefit (annual) = $50 Payback = $100 / $50 = 2 years
    • 16.
      • Payback period ends…then what?
      • Ignores time value of money
      • Deals with opportunity cost, not financial return
      • Unfortunately it is “simple” so used frequently
      Issues With Simple Payback
    • 17. Financial Terms - ROI Ratio of money gained (or lost) relative to investment Benefit / Initial Cost = Return on Investment Cost = $100, Benefit = $50 ROI = $50 / $100 = 50%
    • 18. + + – – Cumulative Annual Internal rate of return = Equivalent interest rate to achieve return
    • 19. Time Value of Money
      • Money NOW > same amount in FUTURE
      • Potential earning capacity
      • Borrowing costs
      • Risk aversion
      • “ Discount rate” quantifies that difference
    • 20. + + – – Cumulative Annual
    • 21. + + – – Cumulative Annual Net present value
    • 22. Economic Analysis
      • Example: Athletic Facility – new lighting
      21.4% 4 years $25K $100K Rate of Return Simple Payback Annual Savings Project Cost
    • 23. Economic Analysis
    • 24. Spend Someone Else’s Money
      • Leasing/Financing – pay from operating budget
      • Bonding for energy improvements
      • Performance contracting – ESCOs
      • Reduced utility bills offset payment
    • 25. Spend Someone Else’s Money
      • Example: Athletic Facility - lighting
      • Using conventional financing:
      5 years 6% $25K $100K Term Length Interest Rate Annual Savings Project Cost
    • 26. Spend Someone Else’s Money
    • 27. The Cost of Waiting
      • $100K project cost
      • $25K annual savings
      • Cost of energy is trending upward
      • $296K avoided over ten years
      • Paid for project 3 times over
    • 28. Questions?
    • 29. Thank You!
      • Efficiency Vermont
      • 255 So. Champlain Street
      • Burlington, Vermont 05401
      • _______________________
      • (888) 921-5990 Phone
      • www.efficiencyvermont.com
      [email_address]

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