The payback time for an investment is the time taken to recover the amount of the investment from the savings produced. The table below shows the investments required for several home insulation improvements.
|
Improvement |
Cost in £ |
Annual Savings in £ |
|
Hot Water Jacket |
15 |
30 |
|
Loft Insulation |
200 |
50 |
|
Double Glazing |
2000 |
100 |
|
Cavity Wall Insulation |
400 |
80 |
The Payback Time in years is equal to
|
Improvement |
Cost in £ |
Annual Savings in £ |
Payback Time in Years |
|
Hot Water Jacket |
15 |
30 |
|
|
Loft Insulation |
200 |
50 |
|
|
Double Glazing |
2000 |
100 |
|
|
Cavity Wall Insulation |
400 |
80 |
|
Notice that the payback time would not be the time taken to pay back a loan taken out to pay for the improvements, the payments being made with the savings produced by the investment. If, for example, a loan at 10% interest is taken out to pay for double glazing using the cost and annual savings above, every year the interest on the loan would be 10% of £2000 =£200 but the annual savings are only £100. The loan will never be paid back and the amount owing will actually increase.