Payback: how long until the saving has repaid the cost

Payback period is the cost divided by the net saving per year, when the saving is the same every year.

Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.

What it is for

A variable-speed drive on a fan costs $9,000 and the plant manager asks one question: when does it pay for itself? The answer is a division, and the projects that get approved are the ones whose owner already knows it.

How to think about it

Cost on top, net saving per year underneath. Net means after any new running cost. A payback under two years usually goes through on the nod; over five usually does not, whatever the technology.

Worked example

Payback = cost / net saving per year

The rule, for a saving that is the same each year.

A drive on a fan: $9,000 installed; saves $2,400 a year in power

The two numbers.

Payback = 9000 / 2400 = 3.75 years

Three years and nine months.

Under 2 years is easy; under 5 needs a case; over 5 rarely happens

The rule of thumb at most plants. Know which bin the number lands in before the meeting.

Your turn

A $15,000 upgrade saving $5,000 a year. Write the payback.

Payback = 15,000 /  = 3 years

The trap

Using the gross saving when there is a new running cost. A compressor that saves $6,000 in power but costs $1,500 a year to service pays back on $4,500, not $6,000.

Practise payback period on HoneA question on it now, a coding challenge where there is one, and it is remembered for review. Free, no email needed.