232 Energy Project Financing: Resources and Strategies for Success
2525*(P|A, 15%,3) + 3840*(P|A, 15%,3)*(P|F, 15%,3)
SIR = ———————————————————————
1000011529.70
SIR = ———— = 1.15297
10000.00Decision: SIR≥1.0 (1.15297>1.0); therefore, the window investment is at-
tractive.An important observation regarding the four measures of worth
presented to this point (PW, AW, IRR, and SIR) is that they are all con-
sistent and equivalent. In other words, an investment that is attractive
under one measure of worth will be attractive under each of the other
measures of worth. A review of the decisions determined in Examples 13
through 16 will confirm this observation. Because of their consistency, it
is not necessary to calculate more than one measure of investment worth
to determine the attractiveness of a project. The rationale for presenting
multiple measures which are essentially identical for decision-making is
that various individuals and companies may have a preference for one
approach over another.A.7.6 Payback Period
The payback period of an investment is generally taken to mean the
number of years required to recover the initial investment through net
project returns. The payback period is a popular measure of investment
worth and appears in many forms in economic analysis literature and
company procedure manuals. Unfortunately, all too frequently, payback
period is used inappropriately and leads to decisions which focus exclu-
sively on short term results and ignore time value of money concepts.
After presenting a common form of payback period, these shortcomings
will be discussed.Measure of Worth: Payback PeriodDescription: The number of years required to recover the initial invest-
ment by accumulating net project returns is determined.