Tag Archives: Decision Making

ROI or Payback Period?

Whether you are upgrading your building’s lighting system, setting up a recycling program, or greening your supply chain, dollars will be spent and those dollars should be considered an investment.  Which is the best financial metric to use for investment decision making?  It depends on what is important to you, and it is crucial to understand the differences in the information each metric provides.  Return on investment and payback period seem to be the two most commonly used financial metrics for making sustainability investment decisions.  Let’s review those two. Return on Investment (ROI):     Simple ROI is the incremental gains of an action divided by the cost of the action.  This metric will predict the percentage or ratio of gains to cost.  You will hear ROI given as a number, usually a percentage.  For example, if someone tells you that your $100,000 investment has an ROI of 25%, you can expect your incremental gains to be 25% more than the investment.   Simple ROI = (Gains – Investment Costs) / Investment Costs   = ($125,000-$100,000) / $100,000  =  0.25 or 25%   The problem with looking at simple ROI alone is that this tells you nothing about time.  How long will  Continue Reading »