Make a stand on FEET

We are all coming round to the idea that saving energy can save us money and cut carbon emissions too – or are we? When firms buy new equipment, whether it is a photocopier or building management system, the person in charge of the purse strings is often not the one responsible for energy conservation. The result: finance director goes for the product with the lowest initial cost without weighing up the savings both in cash and carbon that could be made in the long term by spending a bit more at the outset.

The Federation of Environmental Trade Associations (FETA) has come to the rescue with the FETA Energy Efficiency Technology model (FEET) that will help the environmental manager demonstrate the benefits of spending a few pounds more to the hard-nosed financial director.

FEET is a spreadsheet-based model that can be used to calculate the net cost of investing in a more energy-efficient product, which may well have a higher initial acquisition value but which could result in long-term cost advantages in terms of energy saving. Put simply, cost and operation information is input and results are shown in various ways including the impact they will have on the company’s profit and loss accounts in ensuing years: just the ticket to turn the finance director’s head!

The FEET model breaks down the potential purchase into a series of easily completed worksheets. First is an assumptions worksheet, containing variables specific to the company:

• cost of capital – the percentage return that the organisation expects to achieve from investments;
• tax rate – the simplified corporation tax (currently 30%);
• interest rate – the cost of borrowing or the expected return on invested funds over the life of the project;
• discounted payback period – the period in which the investment is required to achieve a positive cash flow.

Next, the capital investment worksheet details the cost of recommended products and calculates the total capital investment value, thus the net additional cost of selecting the recommended product.

A profit and loss worksheet includes the anticipated energy savings if the recommended product is used. The resulting net profit and loss after tax is shown as the incremental effect of using the recommended product.

An executive summary work sheet shows the actual net result of the investment compared with the hurdle rate required by the company, as follows:

• net present value – the present value of the difference between the cash inflows and outflows for the project;
• internal rate of return – the average rate of return on the money invested in the project;
• discounted payback – the point in the project at which the discounted net cash flow becomes positive.

Finally, a summary of potential savings indicated by the model is produced. These may be sufficient to make the finance director think again about going for the cheapest initial cost option and consider the whole life cost of not just this piece of kit but everything the company buys: they may even get interested in environmental impact, too.

Oh, and here’s one final piece of good news for the finance directo – FEET will soon be available as a free, yes free, download from the FETA website (www.feta.co.uk).