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Module 2: Engineering Economics

Every energy efficiency recommendation asks a facility to spend money today in exchange for savings in the future. This module provides the framework for evaluating whether that trade creates value.

Engineering economics is not about performing sophisticated financial analysis. Rather, it's about understanding how to structure cash flows, communicate the economic benefits of efficiency measures, and recognize how decision-makers evaluate capital investments. Whether you're recommending a $2,000 lighting upgrade or a $200,000 compressed air system overhaul, you need to present the economics clearly and credibly.

Module Objectives

By the end of this module, you should be able to:

  • Identify and organize the cash flow elements of an energy efficiency recommendation
  • Calculate net implementation cost and net annual savings
  • Understand why a dollar today is worth more than a dollar next year
  • Calculate present value and future value using discount factors
  • Interpret net present value (NPV) and explain what it means for project viability
  • Calculate simple payback period for projects with constant annual savings
  • Recognize when simple payback is appropriate and when more sophisticated analysis is needed
  • Explain why ITAC uses simple payback as the primary economic metric
  • Distinguish between lost-opportunity and retrofit recommendations and apply the correct cost basis for each

In This Module

  • Cash Flows — organizing the cost and savings elements of a recommendation
  • TVM and NPV — the time value of money, present value, and net present value
  • Payback — calculating simple payback and knowing when it applies
  • Lost-Opportunity vs. Retrofit — choosing the correct cost basis for each recommendation type