Moving Beyond Simple Payback: The Language of Financial Analysis Richard Donnelly Planning & Development Manager Tim Perri...
Overview <ul><li>Brief Introduction to Efficiency Vermont </li></ul><ul><li>The College & University Market </li></ul><ul>...
Efficiency Vermont: Who We Are <ul><li>Nation’s first statewide provider of energy efficiency services </li></ul><ul><li>C...
Efficiency Vermont: What We Do <ul><li>Technical Assistance & Recommendations </li></ul><ul><li>Coupled with Economic Anal...
<ul><li>Through an Energy Efficiency Charge (EEC) on all electric bills </li></ul><ul><li>Average residential customer ~$2...
Efficiency Lowers Operating Expenses
Efficiency Reduces Carbon Emissions ISO-NE Margin  Supply 1 kWh = 1.26 lbs CO2
Efficiency: Our most cost-effective energy resource
<ul><li>Market Approach to Delivering Services  </li></ul><ul><li>The Role of the College </li></ul><ul><li>Identifying Ba...
The Role  of College & University <ul><li>3% . . . 100% </li></ul><ul><li>Innovation </li></ul><ul><li>Create future leade...
Identifying Barriers <ul><li>Lack of awareness </li></ul><ul><li>Lack of knowledge </li></ul><ul><li>Competing Priorities ...
Seeking Alignment <ul><li>President’s Office </li></ul><ul><li>CFO </li></ul><ul><li>Development & Marketing </li></ul><ul...
Initial Cost – A Common Barrier <ul><li>Buy now, get paid later  </li></ul><ul><li>Competing resource priorities </li></ul...
<ul><li>Simple payback </li></ul><ul><li>Return on investment (ROI) </li></ul><ul><li>Cash flow model  </li></ul><ul><li>I...
Financial Terms – Simple Payback How long will it take to recoup my initial outlay? Initial Cost / Periodic Benefit = Payb...
<ul><li>Payback period ends…then what? </li></ul><ul><li>Ignores time value of money </li></ul><ul><li>Deals with opportun...
Financial Terms - ROI Ratio of money gained (or lost) relative to investment Benefit / Initial Cost = Return on Investment...
+ + – – Cumulative Annual Internal rate of return = Equivalent interest rate to achieve return
Time Value of Money <ul><li>Money NOW  >   same amount in FUTURE </li></ul><ul><li>Potential earning capacity </li></ul><u...
+ + – – Cumulative Annual
+ + – – Cumulative Annual Net present value
Economic Analysis <ul><li>Example: Athletic Facility – new lighting </li></ul>21.4% 4 years $25K $100K Rate of Return Simp...
Economic Analysis
Spend Someone Else’s Money <ul><li>Leasing/Financing – pay from operating budget </li></ul><ul><li>Bonding for energy impr...
Spend Someone Else’s Money <ul><li>Example: Athletic Facility - lighting </li></ul><ul><li>Using conventional financing: <...
Spend Someone Else’s Money
The Cost of Waiting <ul><li>$100K project cost </li></ul><ul><li>$25K annual savings </li></ul><ul><li>Cost of energy is t...
Questions?
Thank You! <ul><li>Efficiency Vermont </li></ul><ul><li>255 So. Champlain Street </li></ul><ul><li>Burlington, Vermont 054...
Upcoming SlideShare
Loading in …5
×

Moving Beyond Simple Payback

943 views
809 views

Published on

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

Published in: Technology, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
943
On SlideShare
0
From Embeds
0
Number of Embeds
9
Actions
Shares
0
Downloads
10
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide
  • 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
  • Moving Beyond Simple Payback

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

    ×