Executive Summary
The aim of financial calculations is to gain a better understanding of water efficiency investment feasibility and profitability. Performing financial calculations is therefore extremely important when it comes to facilitating decision-making and justifying actual investments in water efficiency.
There are various financial calculation methods such as the Simple Payback Period (SPP), the Discounted Payback Period (DPP), the Net Present Value (NPV), the Internal Rate of Return (IRR), the Profitability Index (PI), etc.
The Simple Payback Period method is an easy to use method that calculates how long it will take to recover the amount invested. Advantages of the SPP method are its simplicity and popularity. Two key disadvantages of this method are that it does not consider the profitability or return on investment of the project beyond the breakeven point and that it does not discount future cashflows to their present value. The latter disadvantage is considered and addressed in the Discounted Payback Period.
The Net Present Value method converts all costs and savings to their present value. If the present value of all future savings is greater than the investment, it is considered cost-effective.
The Internal Rate of Return method determines that the present value of annual savings must be equal to the investment and calculates which interest rate fulfils this condition. This interest rate is called the internal rate of return.
The Profitability Index indicates how much value you get for each financial unit invested and is calculated by dividing the present value of expected future cash flows by the initial amount invested. A PI greater than 1 means that a project or investment is profitable and creates value.
The Financial Calculator is a tool that helps in conducting rough financial feasibility analysis for different financing options and compare them using the SPP, DPP, NPV and PI methods. This considers growth projections, loan repayment calculations, intervention-related investment costs (CAPEX) and operation and maintenance costs (OPEX), future savings from improved water efficiency, avoidance of disposal charges, fines, etc., as well as additional revenue from increases in production and sales, etc.
Templates
This Microsoft Excel template allows you to conduct a rough financial feasibility analysis for different financing options using the Payback Period method.