Energy performance can increase the value of an organization by improving the
bottom line. The bottom line in business is net income or earnings; reduced energy
costs can be reflected in increased earnings and earnings per share.
increased earnings can be valued at the prevailing market earnings multiple, or the
Price Earnings Ratio. This approach to valuation is common practice among
analysts, who routinely relate market prices for shares of stock to multiples of
earnings. You can also use this approach to determine the value of energy
performance for your business— that is, increased market capitalization. ENERGY
STAR provides tools that quantify, justify and communicate the impact of energy
performance to a company’s worth.
The process to improved energy performance requires that the financial merits of
opportunities be carefully evaluated.
analysis tools to examine the value, risk, and liquidity impacts of investment
opportunities competing for limited capital resources. To successfully compete against
other business investments, energy performance should be evaluated on the same
basis. Understanding basic financial concepts and using simple analysis tools can
facilitate an informed decision.
This chapter explains the tools necessary to evaluate profitability, cash flow, and
liquidity and presents a framework for using these tools to analyze building upgrade
investments to improve energy performance.
Capital Budgeting Basics
Both for-profit and not-for-profit organizations evaluate potential investments based
on net income (bottom line). To evaluate net income, an organizations use financial
analyses to identify whether an investment exceeds a predetermined hurdle rate while
maintaining acceptable first cost and liquidity requirements. Profitability is measured
by whether a project’s internal rate of return passes the investment hurdle rate. Cash
flow and liquidity are evaluated by first cost and payback.
• First cost is the up-front cost that is i