One of the reasons I print out our financial worksheets and juxtapose them with each other is to demonstrate the outcomes of three scenarios for doing an energy efficiency improvement:
Scenario 1: Pay for the entire project upfront
Scenario 2: Do half the project now and the rest a year from now when more funds become available
Scenario 3: Borrow the money now to fund the project fully and use your savings to repay the loan
A lot of people are laboring under the myth that Scenario 3 is the least attractive option because a significant portion of the project’s return would be consumed by the interest you would have to pay to gain access to the capital.
In Scenario 1, you pay for the entire investment today (“Date 0”) using your own cash, and your net present value over a ten-year period is approximately $53,000.
In Scenario 2, you decide that you only have sufficient capital to fund half the project now (“Date 0”), so you wait to do the second half of the project until a year from now (“Date 1”). In this scenario, you would lose half of the upgrade’s projected savings for the first year. You might also lose half of the rebate or incentive because it might expire before you fund the second half of the project. In fact, our Scenario 2 worksheet is configured using those exact assumptions. It proves that delaying half the project by one year reduces your net present value to about $42,000. You’ve lost more than $10,000 of NPV just because you waited a year to do the second half of the project.
In Scenario 3, you finance the entire project today (“Date 0”) by borrowing the necessary capital and paying a reasonable interest rate. For our example, we assume 12%. In this third scenario, the net present value turns out to be only about $1,000 lower than what you would have realized if you had funded the entire project at Date 0 using your own capital. Why? You have the entire project installed immediately, which means you get the entire project’s energy savings within the first year as well as the full amount of the rebate. And it turns out that the interest you’re paying pales in comparison to the return you’re generating by having both halves of the project implemented at Date 0.
The moral of the story is:
- Try to pay for a project using your own cash.
- If you don't have the cash, don't wait. Finance it.
In other words, implement your projects as soon as possible, even if you have to borrow the capital to do it. As the math suggests, you’ll be happy you did.
