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How to calculate ROI and payback period from LED lighting retrofit project

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How to calculate ROI and payback period from LED lighting retrofit project

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This is the sixth and final blog post in the series to calculate the total Return on Investment (ROI) that a business will generate from their LED lighting retrofit project. Previously, we published the following posts in this series:

  1. How to calculate Material savings from an LED lighting retrofit project – June 2019
  2. How to calculate the HVAC energy savings from an LED lighting retrofit project – April 2019
  3. Energy Savings from an LED Lighting Retrofit projectMarch 2019
  4. Labor Savings from an LED Lighting Retrofit projectFebruary 2019
  5. What will you save from an LED Lighting Retrofit Project?January 2019

The previous five posts provide all of the calculations for the various aspects of your retrofit project so you can determine how much potential savings your organization will realize from your project.  But what does it all mean and will your business be better off?  This post will help tie all of the information together so you can actually see what this means for your business, how long it will take for the project to pay for itself, and your Return on Investment (ROI).

Payback Period and ROI

The Payback Period is the amount of time it will take you to recoup your original investment in the project.  The ROI is a ratio of the total savings from the project to the total project cost and it will demonstrate how profitable the project is.

For this post we will continue our example from the previous posts in the series where we are replacing a 90 watt PAR 38 bulb with a 14 watt LED PAR 38 and is operated for 12 hours per day for 250 days per year.

Step 1 – Determine Total Project Cost

Be sure to include all of the costs associated with the retrofit project, including the cost of new materials, installation costs, and any additional costs for disposal/recycling the old bulbs.  For our example we are using an all-in cost of $40 per bulb, which includes the cost of the replacement LED bulb, installation, and disposal of the old bulb.  For a project with a total of 100 old bulbs being replaced with LEDs, the total project cost would be $4,000 ($40 x 100).

Step 2 – Calculate Annual Savings

Using the calculations from the previous blog posts in the series, here is a recap of the savings:

  • Energy Savings: $27.36 per light per year (See original post)
  • + HVAC Savings: $3.45 per light per year (See original post)
  • + Labor Savings: $25.86 per light per year (See original post) – note that in the original post we used 4,380 total operating hours. Adjusting that computation to be the same as the other savings calculations (250 days per year for 12 hours per day = 3,000 operating hours per year) results in labor savings of $25.86 per light per year.
  • + Material Savings: $13.89 per light per year (See original post)
  • = Total Savings Per Light Per Year: $70.56

For a retrofit project with a total of 100 lights, that amounts to Total Savings of $7,056 annually ($70.56 x 100).

Step 3 – Calculate Payback Period

  • Total Project Cost: $4,000
  • Divided by Total Annual Savings: $7,056
  • Equals: Payback Period in Years: .57 years

That means that the project will pay for itself in just over 6 months!  What are you waiting for?

Step 4 – Calculate Return on Investment (ROI)

The final step in the process of determining the inherent value in the project is to calculate the ROI.  This might be a useful measure for the decision-makers that have multiple projects competing for limited funds.

Total Annual Savings: $7,056

Minus: Total Project Cost: $4,000

Equals – Net Savings: $3,056

Divided by – Total Project Cost: $4,000

Equals – ROI: .764; expressed as a percentage: 76.4%

Think if your retirement plan could generate a return of 76.4% year after year!  In this example it makes sense to invest in the project and start generating the positive returns. 

If your organization is considering an LED retrofit project, contact PKK Lighting in Madison, Wisconsin and our lighting consultants will be happy to walk you through the evaluation of your lighting project.