Calculating insulation's payback
Regarding "Analyzing insulation payback," July issue, page 12, I would like to offer the following comments. In terms of the basic cost calculations, I tend to agree with the NRCA study that the simple payback for roof insulation may be in the 12- to 13-year range when you're evaluating an incremental increase beyond R-20. However, I would suggest this payback may be viewed as financially justifiable if a roof system is considered a capital good subject to return on investment analysis rather than a simple payback calculation.
As a capital good, a new roof system should be treated as a long-term asset that may be leveraged through a variety of financial mechanisms. It can be used as collateral for short-term commercial paper as well as a long-term commercial mortgage. As a result, the financial return generated by an increased amount of insulation may best be measured by comparing the annual energy cost savings against the annual cost of money required to finance the additional insulation.
Currently, high-quality asset-based commercial paper is available at an annual rate less than 3 percent while commercial mortgage rates hover around 4 percent or less. So if a building owner is paying 4 percent or less for the money to finance a new roof system, the 12- to 13-year payback period generates an annual financial return rate of 7.5 to 8.1 percent—around twice as much as the cost of money needed to finance the energy savings. As a result, for every year the roof remains in place, it generates incremental energy cost savings at nearly twice today's cost of money for the marginal amount of insulation financed.