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Savings-to4nvestment Ratios Introduction A variation of the B/C ratio, knownasthe savings-to-investmentratio (SIR), is used when benefits occur primarily as cost reductions (Au and Au 1983). Although SIR is basically a B/C ratio, there is a computational difference. B/C ratios are typically calculated with dl benefits in the numerator and all costs in the denominator. In the calculation of SIR, only the principle investment costs are included in the denominator. All other costs are subtracted from the benefits in the numerator. This, in essence, makes the numerator a measure of net savings. Discussion The SIR ratio is recommended in ranking analyses if costs predominate, simply because SIR can properly rank projects to be selected until the budget is exhausted. SIR is not recommended for use when project- specific debt financing is present because of the issue of whether the investment is defined as only the equity portion of the investment or the total investment. SIR is also not recommended when selecting among mutually exclusive alternatives because differing investment sizes are not considered (i.e., an investorwillchoosetoinvestmoreinanalternativewithmorefavorablereturns). Thisshortcomhgmay be corrected by applying SIR on an incremental basis. The formula for the calculation of the SIR is as follows: SIR = PV (NS) f PV (IRS) (4-22) Where: SIR = PV(NS) = PV(1RS) = savings investment ratio present value of net savings of the activity (i.e., total savings minus all incremental operation and repair costs not directly attributed to incremental investment costs) present value of the sum of incremental investment costs plus incremental replacement costs minus incremental salvage vdues. The higher the SIR ratio, the greater the average savings per dollar expended. For example, an SIR of 2 can be interpreted to mean that the investment will save $2 on average for every $1 invested, over and above the required rate of return reflected in the discount rate. TheconstraintsforB/CratiosoutlinedearlieralsoapplytotheSIR. TheSIRcanbeusedinacceptheject decisionsforsingleprojects. SIRSshouldnotandcannotbeusedreliablytofindoptimalsizesordesigns of investment alternatives unless the analysis is based upon incremental rather than total savings and costs. An SIR computed using total savings and costs tends to reach its maximum value before the most optimal design or size is reached (Ruegg 1987). The most cost-effective value is reached once the incremental savings equal the incremental costs (i.e., the incremental SIR declines to a value of unity). 63PDF Image | A Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies
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