Now what is the financial implication of the energy efficient lighting upgrade (i.e. capital investment, annual savings, pay back)? How do we figure this out? Let's look at a couple of examples.
A large resort named "Wilderness Resort" (located not anywhere near astronomial observatories) has 280 light fixtures used with motion sensors for security reasons, each lighting fixtures has two bulbs as shown below.
These bulbs are 26 watts CFL flood light bulbs and are on an average of 8-hr/day, 365 days/year. The 26W bulb costs $10 each and lasts an average 3,000 hrs (Note the bulbs were rated as 8,000 hours, however, due to frequenty on and off, premature burnout results in an actual lifespan of 3000 hours). As a pollution prevention consultant, you are proposing to upgrade these bulbs to 13 watts LED that costs $13 each and lasts 40,000 hrs. Hotel pays 9 cents/kWh for electricity. CFL bulbs cost 0.75/bulb for proper disposal. You need to show the hotel manager the financial implication of the lighting upgrade. In another word, in your proposal, you need to answer:
1) What is the annual savings?
2) What is the capital cost? (Capital cost refers to initial cost of putting in a system)? Note a labor cost of $0.50 is assumed for each bulb changing.
3) What is the payback?
4) What is return on investment (ROI)?
1) First, we need to think through sources of annual savings? I will give you a minute....., then check the answer below:
There are a total of 4 sources of annual savings:
- savings in electricity;
- savings (or expenses) in purchasing replacement bulbs, since LED lasts much longer than CFL, under the upgrade, less replacement bulbs are needed for LED, but LED cost more, so we have to do the actual math to know whether it comes out as savings or expenses;
- savings in labor involved in changing bulbs; since LED lasts much longer than CFL under the upgrade, less labor is involved in changing bulbs;
- lastly, what about disposal cost associated with CFLs? Remember CFL contains mercury, they should be not disposed as regular trash while LED doesn't have this problem. So under the upgrade, savings from dispose cost of CFLs should be factored in.
Now let's work on exact savings (or expense) occurred in a year (remember we are trying to figure out annual savings). Note some of the numbers shown below maybe a little off due to rounding effect.
a) Savings in electricity = cost of electricity for current CFL - cost of electricity for proposed LED
Cost of electricity = unit cost of electricity ($/kWh) x electricity consumption (kWh)
For current CFL:
Electricity consumption (kWh) = Watts × hours of operation/1000 = (26 watt x 2 bulbs/fixture x 280 fixtures)x 8 hr/day x 365 days/yr /1000 =42515.2 kWh
Cost of electricity = $.09/ kWh x 42515.2 kWh = $3,826
For proposed LED:
Electricity consumption (kWh) = Watts × hours of operation/1000 = (13 watt x 2 bulbs/fixture x 280 fixtures)x 8 hr/day x 365 days/yr /1000 =21257.6 kWh
Cost of electricity = $.09/ kWh x 21257.6 kWh = $1,913
Savings in electricity = $3,826 - $1,913 = $1,913
b) Savings (or expense) in purchasing replacement bulbs = cost of purchasing replacement bulbs for current CFL - cost of purchasing replacement bulbs for proposed LED
Note for every bulb in a fixture, number of replacement bulbs per year = Hours on per year /life of bulb.
For example, if a bulb needs to be on for 1000 hours a year, but the life of bulb is only 500 hours, then we need 2 (1000/500 = 2) bulbs in a year, right?
In this case, each fixture contains 2 bulbs, to factor this in, number of replacement bulbs per year per fixture = hours on per year/life of bulb x bulbs/fixture. So
For current CFL:
Number of replacement bulbs per year per fixture = [(8 hr/day x 365 days/year)/3000 hrs] x 2 bulbs/fixture = 1.947
Number of replacement bulbs = 1.947/fixture x 280 fixture = 545.07
For proposed LED:
Number of replacement bulbs per year per fixture = [(8 hr/day x 365 days/year)/40,000 hrs] x 2 bulbs/fixture = 0.146
Number of replacement bulbs = 0.146/fixture x 280 fixture = 40.88
One can easily tell, we will save lots of replacement bulbs if we use LEDs.
Some of you might wonder how can we replace part of a bulb in a fixture (notice the decimal in 1.947, for example)? good question! In reality, we don't, the replacement will actually happen one this year and another one early the following year, but we need to average or spread the cost of that replacement. So we will keep the decimal in our calculation.
Cost of purchasing replacement bulbs for current CFL = unit cost of the bulb x number of replacement bulbs = $10/bulb x 545.07 = $5,451
Cost of purchasing replacement bulbs for proposed LED = unit cost of the bulb x number of replacement bulbs = $13/bulb x 40.88 =$531
Savings in purchasing replacement bulbs = $5,451 - $531 = $4,919
c) Savings in labor involved in changing bulbs = cost of labor in changing CFL bulbs - cost of labor in changing LED bulbs
Since we need to change a bulb every time a bulb burns out, the number of bulb changing should equal the number of replacement bulbs. We have calculated number of replacement CFL bulbs (i.e. 545.07) and replacement LED bulbs (i.e. 40.88), see calculation under b) above. Therefore,
Cost of labor in changing CFL bulbs = $0.5/bulb changing x 545.07 bulb changing = $273
Cost of labor in changing LED bulbs = $0.5/bulb changing x 40.88 bulb changing = $20
Savings in labor involved in changing bulbs =$273 - $20 = $252
d) Savings (or Expenses) in disposal = disposal cost for the current CFL- disposal cost for the proposed LED
You have learned from other business that on average the disposal cost of CFL is $0.75/bulb.
Disposal cost for the proposed CFLs = $0.75/bulb x 545.07 replacement bulbs = $409
Disposal cost for the proposed LED = $0
Savings in disposal = $409 - $0 = $409 (the negative sign in savings implies that it is actually an expense)
Total annual savings = Savings in electricity + Savings in purchasing replacement bulbs + Savings in labor involved in changing bulbs + Savings (or Expenses) in disposal
= $1,913 + $4,914 + $252 + $409 = $7,488
2) Capital cost in this case involves purchasing cost of LED bulbs as well as the labor cost of each bulb changing
Capital Cost = cost of purchasing bulbs + labor cost of switching bulbs
= 280 fixtures x 2 bulbs/fixture x $13/bulb + 280 fixtures x 2 bulb changing/fixture x $0.50/bulb changing
= 280 x 2 x $13 + 280 x 2 x $0.5 = $7,280 + $280 = $7,560
3) Now we need to figure out pay-back. Remember pay-back is the time it takes for the the annual savings to offset the capital investment, therefore we can figure out pay-back using the following formula
In this case, the capital investment is the cost of switching bulbs which has been found to be $ 7,560. Annual savings were found to be $7,488
So payback (yr) = $ 7,560/$7,488 = 1.01 year
4) To calculate Return on Investment (ROI), we need to use the following formula:
In this case, ROI = 1/1.01 = 99%
As one can see, there is a lot of calculation involved in doing a financial analysis for a P2 upgrade! It is very easy to make a mistake in any steps of the calculation even if you get the approach right but simply put the wrong numbers done in calculator. Is there a better way to do this?
The answer is YES!
We will use EXCEL spreadsheet formula functions and linking between sheets functions to conduct financial analysis! In this approach, we need to set formula up in EXCEL, enter specifications such as life span of a lamp or operating hours, then EXCEL will do all the calculations! Not only this will eliminate errors in calculation as long as we use the right approach, it also present our financial analysis in a professional way!
We will use the next section to learn how to conduct a financial analysis using EXCEL!