6.3 Payback, ROI and lifecycle cost
Simple payback is the number of years the yearly saving takes to repay the extra investment. ROI (return on investment) is the yearly saving as a percentage of investment. Lifecycle cost adds up purchase, energy, maintenance and replacement over the equipment's life.
It is like choosing between a cheap two-wheeler that drinks petrol and a costlier efficient one. After a few years the efficient one has paid for its extra price.
Lifecycle cost often uses NPV (net present value). NPV discounts future savings because ₹1 next year is worth less than ₹1 today. The discount rate is usually the company's cost of capital.
Worked example — hotel in Bengaluru replacing LPG for hot water
Demand: 3,000 litres per day heated from 25 °C to 60 °C, every day.
- Daily heat: Q = 3,000 kg × 4.186 kJ/kg·K × 35 K = 439,530 kJ ÷ 3,600 = 122 kWh/day.
- Yearly heat: 122 × 365 ≈ 44,560 kWh.
- LPG: 44,560 ÷ (12.8 × 0.85) ≈ 4,096 kg × ₹100 = ₹4.10 lakh. Add maintenance ₹10,000 (example). Total ≈ ₹4.20 lakh/yr.
- Heat pump at COP 3.5: 44,560 ÷ 3.5 ≈ 12,730 kWh × ₹9 = ₹1.15 lakh. Add maintenance ₹15,000 (example). Total ≈ ₹1.30 lakh/yr.
- Net annual saving ≈ ₹4.20 − ₹1.30 = ₹2.90 lakh.
- Installed heat pump system (example): ₹9.0 lakh. Simple payback = 9.0 ÷ 2.90 ≈ 3.1 years.
- Simple ROI = 2.90 ÷ 9.0 ≈ 32% per year.
- NPV over 10 years at 10% discount rate: annuity factor = (1 − 1.1⁻¹⁰) ÷ 0.1 = 6.145. NPV = 2.90 × 6.145 − 9.0 ≈ ₹8.8 lakh.
| Measure | What it tells you | Weakness |
|---|---|---|
| Simple payback | How fast the money comes back | Ignores savings after payback and time value of money |
| Simple ROI | Yearly return on capital | Same as above |
| NPV | Value created today, in ₹ | Needs a discount rate assumption |
| IRR (internal rate of return) | The discount rate at which NPV = 0 | Harder to explain; can mislead on small projects |
| Lifecycle cost | Total cost of ownership | Needs life and replacement assumptions |
Remember
- Payback = extra capital ÷ net annual saving.
- Include maintenance on both sides.
- NPV shows value; payback shows speed.
- Test the result with higher and lower fuel prices (sensitivity).
a heat pump costs more to buy but less to run, so judge it over its whole life, not on purchase price.
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