There are two very common metrics used to evaluate the financial appeal of an LED lighting project: simple payback and return on investment. Many are already familiar with these metrics but the following information will provide a brief explanation for those who are not and will also provide some important considerations when calculating these metrics for an LED savings project.
The first financial metric is Simple Pay Back. Simple Payback is the amount of time that is required for the savings created from converting to LED to pay off the cost of the LED project. Typical LED payback times are between 1 and 5 years. The mathematical formula for this metric is the total cost of the project divided by the totaling savings. If an LED project costs $50,000 and savings $25,000, its simple payback is two years.
Similarly, the Annual Return on Investment, often abbreviate ROI, is the percentage of the original investment (i.e. project cost) that is paid back each year from the savings of the project. The mathematical formula for this metric is the total savings dividing by the total cost of the project. If an LED project costs $50,000 and savings $25,000, its ROI is 50%.
Typical LED ROIs percentages are between 20% and 100%. Since the ROIs of more traditional, conservative investments (e.g. mutual funds, real estate portfolios, etcetera) typically range between 5% to 10%, returns from an LED project can be considered very appealing.
If you have any questions or would like a more in-depth explanation of any of the concepts discussed in this or any installment, feel free to contact ENLIGHTEN directly: email@example.com / (313) 300-2843.