ASTM E1121-98

Standard Practice for Measuring Payback for Investments in Buildings and Building Systems

SCOPE
1.1 This practice provides a recommended procedure for calculating and applying the payback method in evaluating building designs and building systems.

General Information

• Status: Historical
• Publication Date: 09-Sep-1998
• ICS: 03.060 - Finances. Banking. Monetary systems. Insurance
• ICS: 91.010.99 - Other aspects
• Technical Committee: E06 - Performance of Buildings
• Drafting Committee: E06.81 - Building Economics

Relations

• Replaced By: ASTM E1121-02 - Standard Practice for Measuring Payback for Investments in Buildings and Building Systems
• Effective Date: 10-Oct-2002
• Referred By: ASTM E3130-21 - Standard Guide for Developing Cost-Effective Community Resilience Strategies
• Effective Date: 10-Sep-1998
• Referred By: ASTM E3008/E3008M-16(2023) - Standard Classification for Transportation Surface Elements—UNIFORMAT II
• Effective Date: 10-Sep-1998
• Referred By: ASTM E1765-16(2023) - Standard Practice for Applying Analytical Hierarchy Process (AHP) to Multiattribute Decision Analysis of Investments Related to Projects, Products, and Processes
• Effective Date: 10-Sep-1998
• Referred By: ASTM E2506-15(2020)e1 - Standard Guide for Developing a Cost-Effective Risk Mitigation Plan for New and Existing Constructed Facilities
• Effective Date: 10-Sep-1998
• Referred By: ASTM E964-15(2020)e1 - Standard Practice for Measuring Benefit-to-Cost and Savings-to-Investment Ratios for Buildings and Building Systems
• Effective Date: 10-Sep-1998
• Referred By: ASTM E2204-15(2020)e1 - Standard Guide for Summarizing the Economic Impacts of Building-Related Projects
• Effective Date: 10-Sep-1998
• Referred By: ASTM E1074-15(2020)e1 - Standard Practice for Measuring Net Benefits and Net Savings for Investments in Buildings and Building Systems
• Effective Date: 10-Sep-1998
• Referred By: ASTM E2103/E2103M-19 - Standard Classification for Bridge Elements—UNIFORMAT II
• Effective Date: 10-Sep-1998
• Referred By: ASTM E1057-15(2020)e1 - Standard Practice for Measuring Internal Rate of Return and Adjusted Internal Rate of Return for Investments in Buildings and Building Systems
• Effective Date: 10-Sep-1998
• Referred By: ASTM E1185-15(2020)e1 - Standard Guide for Selecting Economic Methods for Evaluating Investments in Buildings and Building Systems
• Effective Date: 10-Sep-1998
• Referred By: ASTM E1557-09(2020)e1 - Standard Classification for Building Elements and Related Sitework—UNIFORMAT II
• Effective Date: 10-Sep-1998
• Referred By: ASTM E1369-15(2020)e1 - Standard Guide for Selecting Techniques for Treating Uncertainty and Risk in the Economic Evaluation of Buildings and Building Systems
• Effective Date: 10-Sep-1998
• Referred By: ASTM E917-17(2023) - Standard Practice for Measuring Life-Cycle Costs of Buildings and Building Systems
• Effective Date: 10-Sep-1998

Standards Content (Sample)

NOTICE: This standard has either been superseded and replaced by a new version or discontinued.
Contact ASTM International (www.astm.org) for the latest information.
Designation: E 1121 – 98 An American National Standard
Standard Practice for
Measuring Payback for Investments in Buildings and
Building Systems
This standard is issued under the fixed designation E 1121; the number immediately following the designation indicates the year of
original adoption or, in the case of revision, the year of last revision. A number in parentheses indicates the year of last reapproval. A
superscript epsilon (e) indicates an editorial change since the last revision or reapproval.
1. Scope 4.1.3 Section 4, Summary of Practice—Outlines the con-
tents of the practice.
1.1 This practice provides a recommended procedure for
4.1.4 Section 5, Significance and Use—Explains the signifi-
calculating and applying the payback method in evaluating
cance and use of this practice.
building designs and building systems.
4.1.5 Section 6, Procedures—Describes step-by-step the
2. Referenced Documents
procedures for making economic evaluations of buildings.
4.1.6 Section 7, Objectives, Alternatives, and Constraints—
2.1 ASTM Standards:
Identifies and gives examples of objectives, alternatives, and
E 833 Terminology of Building Economics
constraints for a payback evaluation.
E 917 Practice for Measuring Life-Cycle Costs of Buildings
4.1.7 Section 8, Data and Assumptions—Identifies data
and Building Systems
needed and assumptions that may be required in a payback
E 964 Practice for Measuring Benefit-to-Cost and Savings-
evaluation.
to-Investment Ratios for Buildings and Building Systems
4.1.8 Section 9, Compute Payback Period—Presents alter-
E 1057 Practice for Measuring Internal Rate of Return and
native approaches for finding the payback period.
Adjusted Internal Rate of Return for Investments in Build-
4.1.9 Section 10, Applications—Explains the circumstances
ings and Building Systems
for which the payback method is appropriate.
E 1074 Practice for Measuring Net Benefits for Investments
4.1.10 Section 11, Limitations—Discusses the limitations of
in Buildings and Building Systems
the payback method.
E 1185 Guide for Selecting Economic Methods for Evalu-
ating Investments in Buildings and Building Systems
5. Significance and Use
2.2 ASTM Adjuncts:
5.1 The payback method is part of a family of economic
Discount Factor Tables, Adjunct to Practice E 917
evaluation methods that provide measures of economic perfor-
Computer Program and User’s Guide to Building Main-
mance of an investment. Included in this family of evaluation
tenance, Repair, and Replacement Database for Life-
methods are life-cycle costing, benefit-to-cost and savings-to-
Cycle Cost Analysis, Adjunct to Practices E 917, E 964,
investment ratios, net benefits, and internal rates of return.
E 1057, and E 1121
5.2 The payback method accounts for all monetary values
3. Terminology associated with an investment up to the time at which cumu-
lative net benefits, discounted to present value, just pay off
3.1 Definitions—For definitions of terms used in this
initial investment costs.
practice, refer to Terminology E 833.
5.3 Use the method to find if a project recovers its invest-
4. Summary of Practice
ment cost and other accrued costs within its service life or
within a specified maximum acceptable payback period
4.1 This practice is organized as follows:
(MAPP) less than its service life. It is important to note that the
4.1.1 Section 2, Referenced Documents—Lists ASTM stan-
decision to use the payback method should be made with care.
dards and adjuncts referenced in this practice.
(See Section 11 on Limitations.)
4.1.2 Section 3, Definitions—Addresses definitions of terms
used in this practice.
6. Procedures
6.1 The recommended steps for making an economic evalu-
This practice is under the jurisdiction of ASTM Committee E-6 on Performance
ation of buildings or building components are summarized as
of Buildings and is the direct responsibility of Subcommittee E06.81 on Building
Economics. follows:
Current edition approved Sept. 10, 1998. Published March 1999. Originally
6.1.1 Identify objectives, alternatives, and constraints,
published as E 1121 – 86. Last previous edition E 1121 – 93.
2 6.1.2 Select an economic evaluation method,
Annual Book of ASTM Standards, Vol 04.11.
6.1.3 Compile data and establish assumptions,
Available from ASTM Headquarters. Order PCN 12-509170-10.
Available from ASTM Headquarters. Order PCN 12-509171-10 for the 3.5 in.
6.1.4 Convert cash flows to a common time basis, and
disk. Order PCN 12-509172-10 for the 5.25 in. disk.
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NOTICE: This standard has either been superseded and replaced by a new version or discontinued.
Contact ASTM International (www.astm.org) for the latest information.
E 1121
6.1.5 Compute the economic measure and compare alterna-
where:
tives.
B 5 dollar value of benefits (including earnings,
t
6.2 Only the step in 6.1.5, as applied to measuring payback,
cost reductions or savings, and resale values,
is examined in detail in this practice. For elaboration on the
if any, and adjusted for any tax effects) in
steps in 6.1.1-6.1.4, consult Practices E 964 and E 917, and
period t for the building or system being
Guide E 1185.
evaluated less the counterpart benefits in pe-
riod t for the mutually exclusive alternative
7. Objectives, Alternatives, and Constraints
against which it is being compared.
7.1 Specify the kind of building decision to be made. Make
˜
5 dollar value of costs (excluding initial invest-
C
t
explicit the objectives of the decision maker. And identify the
ment cost, but including operation, mainte-
alternative approaches for reaching the objectives and any
nance, and replacement costs, adjusted for any
constraints to reaching the objectives.
tax effects) in period t for the building or
7.2 An example of a building investment problem that
system being evaluated less the counterpart
might be evaluated with the payback method is the installation
cost in period t for the mutually exclusive
of storm windows. The objective is to see if the costs of the
alternative against which it is being compared.
storm windows are recovered within the MAPP. The alterna-
B −TC 5 net cash flows in year t,
t t
tives are (1) to do nothing to the existing windows or (2)to
C 5 initial project investment costs, as of the base
o
install storm windows. One constraint might be limited avail-
time,
able funds for purchasing the storm windows. If the payback i 5 discount rate per time period t, and
period computed from expected energy savings and window 1 5 formula for determining the single present
t
value factor,
investment costs is equal to or less than the specified MAPP,
~1 1 i!
the investment is considered acceptable using this method.
NOTE 1— Eq 1 and all others that follow assume the convention of
7.3 Whereas the payback method is appropriate for solving
discounting from the end of the year. Cash flows are assumed to be spread
the problem cited in 7.2, for certain kinds of economic
evenly over the last year of payback so that partial year answers can be
problems, such as determining the economically efficient level
interpolated.
of insulation, Practices E 917 and E 1074 are the appropriate
9.2.2 Uniform Net Cash Flows:
methods.
˜
9.2.2.1 For the case where (B −C ) is the same from year
t t
8. Data and Assumptions
˜
to year, denoted by (B − C), the payback period (PB) corre-
8.1 Data needed to make payback calculations can be
sponding to any discount rate (i) other than zero can be found
collected from published and unpublished sources, estimated,
using Eq 2.
or assumed. (See the adjunct entitled Computer Program and
log 1/ 1 2 SPB ·i
@ ~ ~ !!#
User’s Guide to Building Maintenance, Repair, and Replace-
PB 5 (2)
log ~1 1 i!
ment Database for Life-Cycle Cost Analysis.)
8.2 Both engineering data (for example, heating loads,
where
equipment service life, and equipment efficiencies) and eco-
˜
SPB 5 C /~B 2 C!. (3)
o
nomic data (for example, tax rates, depreciation rates and
periods, system costs, energy costs, discount rate, project life, When the discount rate is equal to zero,
price escalation rates, and financing costs) will be needed.
PB 5 SPB (4)
8.3 The economic measure of a project’s worth varies
However PB is undefined when (SPB · i) $ 1; that is, the
considerably depending on the data and assumptions. Use
project will never pay for itself at that discount rate.
sensitivity analysis to test the outcome for a range of the less
9.2.2.2 A calculation using Eq 2 is presented for the
certain values in order to identify the critical parameters.
following investment problem. What would be the payback
9. Compute Payback Period
period for a project investment of $12 000, earning uniform
9.1 The payback method finds the length of time (usually
annual net cash flows of $4500 for six years? A 10 % discount
specified in years) between the date of the initial project
rate applies. First solve for the SPB: $12 000/$4500 5 2.6667.
investment and the date when the present value of cumulative
Eq 2 would yield the following:
future earnings or savings, net of cumulative future costs, just
log@1/~1 2 ~2.6667 ·0.10!!#
equals the initial investment. This is called the payback period. PB 5 5~log 1.3636/log 1.1000!
log 1.10
When a zero discount rate is used, this result is referred to as
5 ~0.1347/0.0414!
the “simple” payback (SPB). The payback period can be
5 3.25
determined mathematically, from present-value tables, or
9.2.2.3 Since the payback period (3.25 years) is less than the
graphically.
six years over which the project earns constant net benefit
9.2 Mathematical Solution:
returns, and since a shorter MAPP has not been specified, the
9.2.1 To determine the payback period, find the minimum
project is considered acceptable.
solution value of PB in Eq 1.
9.2.3 Unequal Net Cash Flows:
PB
9.2.3.1 For problems with unequal annual net cash flows, a
˜
t
B 2 C !/~1 1 i!#5 C (1)
@~
( t t o
t 5 1 common approach to calculating the payback period is to
NOTICE: This standard has either been superseded and replaced by a new version or discontinued.
Contact ASTM International (www.astm.org) for the latest information.
E 1121
accumulate the present value of net cash flows year-by-year itself at discount rate i if
until the sum just equals or exceeds the original investment
SPB ~12~1 1 i!/~1 1 e!!# 2 1 (8)
costs. The number of years required for the two to become
9.2.4.3 If the payback period is less than the period over
equal is the payback period.
which the project yields returns, the project is considered to be
9.2.3.2 This approach is illustrated in Table 1. A project with
economically acceptable.
seven years of unequal cash flows (Column 2) is evaluated at
9.2.4.4 Eq 6 can be illustrated with the following problem.
a discount rate of 12 %. The net cash flow in each year is
An energy conservation investment of $40 000 yielding energy
discounted at 12 % to present value (Column 3). Each year’s
savings initially worth $8000 annually is to be evaluated with
addition to the present value is accumulated in Column 4. The
an 8 % energy price escalation and a 12 % discount rate.
present value of net benefits (PVNB) in Column 6 is derived by
Applying Eq 6 yields the following:
subtracting the investment costs (Column 5) from the cumula-
tive, discounted, future net cash flows (Column 4). The present log 1 1 $40 000/$8000 1 2 1.12/1.08
@ ~ !~ ~ !!#
PB 5
value of net cash flows equals investment costs at some point
log ~1.08/1.12!
in the fifth year. The payback period can be interpolated as
log@1 1 5~20.0370!#
follows:
log 0.9643
02~2$3011!
log 0.8150
PB 5 4 years 1 5 4.38
$49332~2$3011!
log 0.9643
9.2.3.3 Since the payback period is less than the period over
5 5.63 years
which the project earns positive net benefits (seven years), and
9.3 Estimating Payback Periods with Present-Value Tables:
since a shorter MAPP has not been specified, the project is
9.3.1 Present-value tables, such as those found in Discount
considered acceptable.
Factor Tables, Adjunct to Practice E 917, can be used in certain
9.2.4 Net Cash Flows Escalating at a Constant Rate:
cases to estimate payback periods without a calculator.
9.2.4.1 To determine the payback period when net cash
9.3.2 Uniform Net Cash Flows:
flows escalate at a constant rate, find the minimum solution of
9.3.2.1 The payback period for a project with uniform
PB in Eq 5.
˜
PB annual net cash flows (B − C) can be estimated by first finding,
˜ t
~B2 C!* @~1 1 e!/~1 1 i!# 5 C (5)
( in a table of Uniform Present Value (UPV) factors for the given
o
t 5 1
discount rate, that UPV factor closest to the ratio of
where:
˜
Initial Investment/ B 2 C!* (9)
~
˜
5 initial value of an annual, uniformly escalating,
(B − C)*
net cash flow, and
The appropriate payback period is the number of periods (n)
e 5 constant price escalation rate per period t
corresponding to that UPV factor. Interpolation can be used to
applicable to net cash flows.
more closely approximate the payback period.
9.2.4.2 When e is not equal to i, the payback period can be
9.3.2.2 As an example, when the discount rate is 12 %, the
calculated by using Eq 6.
payback period for an initial investment of $100 which returns
log@1 1 ~SPB!~1 2 ~1 1 i!/~1 1 e!!#
$15 per year is found as follows: The ratio of $100/$15 5 6.67.
PB 5 (6)
log 1 1 e / 1 1 i
@~ ! ~ !#
This ratio corresponds to a time period (n) of approximately
˜
14.2 years in a table of Uniform Present Value factors based on
where SPB 5 C /(B − C)*.
o
a 12 % discount rate.
When e is equal to i,
9.3.3 Net Cash Flows Escalating at a Constant Rate:
PB 5 SPB (7)
9.3.3.1 The payback period for a project with annual net
However PB is undefined and the project will never pay for cash flows escalating at a constant rate can be estimated by first
TABLE 1 Payback Problem With Unequal Annual Cash Flows
(1) (2) (3) (4) (5) (6) 5 (4) − (5)
Cumulative
Cumulative PVNB
Discounted
Discounted Investment
A
($)
Net Cash Flows
Net Cash Flows
Years Cost
Net Cash Flows
˜
s
($)
($) B 2 C
t t
(t, s) ($) ($)
−C
˜ ( F tG o
(B −C )
t t
B 2 C t 5 1
˜ ~1 1 i!
t t s (C )
o
B 2 C
t t
F G
t
~1 1 i! ( F G
t
i 5 1 ~1 1 i!
0 0 0 0 50 000 −50 000
1 10 000 8 929 8 929 −41 071
2 20 000 15 944 24 873 −25 127
3 15 000 10 677 35 550 −14 450
4 18 000 11 439 46 989 −3 011
5 14 000 7 944 54 933 +4 933
6 12 000 6 080 61 013 +11 013
7 8 000 3 619 64 632 +14 632
A
The discount rate 5 12 %.
NOTICE: This standard has either been superseded and replaced by a new version or discontinued.
Contact ASTM International (www.astm.org) for the latest information.
E 1121
finding, in a table of Modified Uniform Present Value (UPV*) graphical approach to find th
...