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Article: Simple payback: the wrong tool for energy project analysis?(Report)
- Article from:
- Management Quarterly
- Article date:
- June 22, 2009
- Author:
CopyrightCOPYRIGHT 2009 National Rural Electric Cooperative Association. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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Industrial decision-makers everywhere depend on "simple payback" as a way to evaluate proposed investments in their facilities. Compared to more sophisticated financial measures such as net present value and internal rate of return, payback is comparatively simple to understand and calculate --perfect for "back of the envelope" analysis. But its inherent simplicity also creates problems. As a managerial decision tool, payback remains grossly inexact and misapplied, especially when thousands or even millions of dollars are at stake. As a result, the reliance on simple payback to evaluate energy-related investment decisions leads to making the wrong choice--and losing money ...