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inclusioncomplicatestheanalysisandloosestheadvantagesofsimplicity. SPBisalsonotrecommended for selecting among mutually exclusive alternatives because the values of differing investment sizes are not considered;i.e., aninvestor will chooseto invest more in an alternativehaving more favorablereturns. This shortcoming may be corrected by applying SPB on an incremental basis. When ranking projects, SPB is not recommended because it ignores returns after payback. The SPB can be expressed as the first point in time at which: EnAI, 5EnAS,, (4-19) Where: SPB = minimumnumberofyearsrequiredforthenondiscountedsumofannualcashflowsnet annual costs to equal or exceed the nondiscounted investment costs AI = nondiscountedincrementalinvestmentcosts(includingincrementalfinancecharges) AS = nondiscounted sum value of the annual cash flows net annual costs. Discussion One drawback to the SPB method is that it ignores the time value of money. That is, the use of SPB implies that there are no opportunity costs to the investor (Le., the investor’s discount rate is zero) (Ruegg 1987). However, the simple payback method is easy to understand and calculate, and can be useful if there are uncertainties, such as uncertain tenure or life of the technology. When there is a high degree of uncertainty associated with future cash flows, SPB gives an indication of how long one’s assumptions must hold to ensure that at least the principal is returned to the investor. Discounted Payback Period Introduction The discounted payback period (DPP) is the number of years necessary to recover the project cost of an investment while accounting for the time value of money. DPB is recommended when risk i s an issue (i.e., significant uncertainties are present) because DPB allows for a quick assessment of the duration during which an investor’s capital is at risk. DPB is not recommended when evaluating alternatives involving financing and tax features because their inclusion complicatestheanalysisandloosestheadvantagesofsimplicity. DPBisalsonotrecommendedwhen selectingamongmutuallyexclusivealternativesbecausedifferinginvestmentsizesarenotconsidered(i.e., aninvestorwillchoosetoinvestmoreinanalternativewithmorefavorablereturns). Thisshortcoming may be corrected by applying DPB on an incremental basis. When ranking projects, DPB is not recommended because i t ignores returns after payback. 57PDF Image | A Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies
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