Value Beyond Cost Savings - Green Building Finance Consortium

Appendix FSustainable Property Financial Analysis AlternativesAnalysis/Model Description/Commentary Key Links/Examplesto be replaced much less frequently, maintenance (operating)costs would be reduced.2. Simple Return onInvestment (ROI)The Return on Investment metric is another relatively simplemeasure that considers the energy savings in relation to theinitial investment. 99 It presumes that the benefits are ongoingand permanent.ROI = (S / ICC) x 100WhereROI = Return on Investment (percent)ICC = Initial Capital Costs (dollars)S = Net Annual Energy Savings (dollars)The ROI is the inverse of the SPP, and therefore requires theexact same inputs with the same limitations and will havesimilar applicability. Given its relative simplicity, it is generallyappropriate for investments that are relatively small in scaleand that involve technologies with a track record that allows forreasonably accurate estimates of the cost to implement andreasonably accurate estimates of energy cost savings.As generally applied, the investment decision will be acceptedif the ROI exceeds an internally established threshold such asthe company’s cost of capital or return on other competinginvestments.See links for Simple Payback Period identified above and more listed intext of Chapter.3. Simple Change inAsset Value: DirectCapitalization(CAV-DC)Another method of evaluating energy investment decisions isto consider the impact on property value that the investmentwill have by applying a direct capitalization approach. Asgenerally applied, this approach capitalizes the change in NOIresulting from the Net Annual Energy Savings and compares itto the Initial Capital Cost as follows:Asset Valuation: Direct Capitalization = S/R0 - ICCWhereS = Net Annual Energy Savings (dollars)99 This metric is referred to as the Accounting Rate of Return in the Royal Institute of Chartered Surveyors “Energy Appraisal of Existing Buildings – a Handbook for Surveyors”.219