| Internal Rate of Return: |
| This rate of return can be compared against the rates of returns or
interest rates of alternative investments, such as stocks, bonds, certificates of deposit,
etc. If energy costs are not tax deductible, which is the case with residential energy
costs, the rate of return of the efficiency measure is an after-tax return. It
should be compared against tax-free investments (e.g. tax-free municipal bonds)
or against the after-tax rate of return of taxable investments. |
|
| Net Present Value: $ |
| If the Net Present Value (NPV) is greater than $0, then the energy
efficiency measure provides a better return than the alternative investment. The NPV is
calculated by adding together all the benefits of the efficiency measure over its life and
subtracting out the costs. Benefits and costs are "discounted" to account for
the time-value of money (the ability of money to earn interest). The
Net Present Value is a better measure to use than Internal Rate of Return when comparing a
number of possible efficiency measures that are "mutually exclusive", meaning
only one can be implemented. For example, NPV is a good measure to use when
trying to determine what level of insulation to add to an attic. Only one level of
insulation can be chosen, i.e. they are mutually exclusive. Analyze each level of
insulation as a separate calculation in the above calculator. Choose the level that
produces the highest NPV. |