# Simple vs Discounted Payback on Energy Upgrades: 8.3 Years or 11.4?

The same heat pump pays back in 9.4 years, 8.3 years, or 11.4 years depending on which two things you leave out. Here is one retrofit run through all three methods plus net present value, and why the quoted payback is almost always the optimistic one.

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- **Canonical URL:** https://dothecalculation.com/blog/green/simple-vs-discounted-payback-energy-upgrades
- **Category:** Eco & Sustainability
- **Author:** Do The Calculation Team
- **Published:** 2026-08-03
- **Reading time:** 12 min read
- **Publisher:** Do The Calculation (https://dothecalculation.com)
- **Methodology:** https://dothecalculation.com/methodology

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## Three Payback Numbers for One Heat Pump

Simple payback divides the cost by the annual saving and stops. It is the number on every quote, and it ignores two things that pull in opposite directions: energy prices rise, which shortens payback, and money has a cost, which lengthens it.

Discounted payback includes the cost of money. Net present value and internal rate of return go further and value the whole equipment life rather than just the moment you break even. This article runs one retrofit through all of them.

Tool: [Try the heat pump savings calculator](https://dothecalculation.com/calculators/heat-pump-savings-calculator) — Estimate annual energy savings from your own fuel prices, efficiency ratings, and heating load.

## The project

**Inputs used throughout**
| Input | Value |
| --- | --- |
| Installed cost | $14,500 |
| Rebate | −$2,000 |
| Net cost | $12,500 |
| Year one energy saving | $1,450 |
| Extra annual maintenance | −$120 |
| Net year one benefit | $1,330 |
| Energy price escalation | 3% a year |
| Discount rate | 6% |
| Equipment life | 15 years |

## Simple payback: 9.4 years, or 8.3

**Simple payback**

```
Payback = Net cost ÷ Annual net saving
```
- 12,500 ÷ 1,330 = 9.4 years
- This assumes the saving is the same in year fifteen as in year one.
- It also assumes a dollar saved in year nine is worth a dollar today.

Energy prices do not stay still. Escalating the saving at 3% a year while holding maintenance flat brings the crossing point forward.

**Cumulative net benefit with 3% energy escalation**
| Year | Energy saving | Net benefit | Cumulative |
| --- | --- | --- | --- |
| 1 | $1,450 | $1,330 | $1,330 |
| 3 | $1,538 | $1,418 | $4,122 |
| 5 | $1,632 | $1,512 | $7,098 |
| 7 | $1,731 | $1,611 | $10,271 |
| 8 | $1,783 | $1,663 | $11,934 |
| 9 | $1,837 | $1,717 | $13,651 |

The cumulative benefit passes $12,500 about a third of the way through year nine, giving a payback of 8.3 years. Escalation shortened it by 1.1 years, and that is entirely a function of an assumption about future energy prices that nobody can verify.

## Discounted payback: 11.4 years

Now apply the other correction. A dollar saved in year nine is not worth a dollar today, because you gave up $12,500 up front and that money had an alternative use. At a 6% discount rate, each year's saving is worth less than its face value.

**The same benefits, discounted at 6%**
| Year | Net benefit | Discounted | Cumulative discounted |
| --- | --- | --- | --- |
| 1 | $1,330 | $1,255 | $1,255 |
| 3 | $1,418 | $1,191 | $3,668 |
| 5 | $1,512 | $1,130 | $5,958 |
| 7 | $1,611 | $1,072 | $8,130 |
| 9 | $1,717 | $1,016 | $10,189 |
| 11 | $1,829 | $963 | $12,142 |
| 12 | $1,887 | $938 | $13,080 |

Discounted payback lands at 11.4 years, three years later than the escalated simple figure and two years later than the unadjusted one. The two corrections do not cancel out; at these rates the discounting is the larger effect.

> **The three answers, side by side** — Simple payback, no escalation: 9.4 years. Simple payback with 3% escalation: 8.3 years. Discounted payback at 6%: 11.4 years. All three are arithmetically correct on the same project. The quote will show you the 8.3.

## The discount rate is the whole argument

There is no neutral discount rate. What it should be depends on what the money would otherwise do, and that varies by household more than any other input in the calculation.

**Discounted payback at different discount rates**
| Discount rate | Reasonable when | Discounted payback |
| --- | --- | --- |
| 0% | Never, but it is what simple payback assumes | 8.3 years |
| 3% | Cash sitting in a savings account | 9.6 years |
| 6% | Mortgage rate, or a balanced portfolio | 11.4 years |
| 9% | Higher-rate borrowing or equity expectations | 14.4 years |
| 20% | Credit card debt funding the work | Never within the equipment life |

The bottom row is the practical finding. Financing an energy retrofit on a credit card does not pay back within the life of the equipment, no matter how good the equipment is. The efficiency of the heat pump is irrelevant to that conclusion, which is set entirely by the cost of the money.

## What payback misses entirely

Every payback method stops counting at the break-even point. A project that pays back in year eleven and then delivers four more years of savings is treated identically to one that pays back in year eleven and fails in year twelve.

**Valuing the full 15-year life**
| Measure | Value | What it says |
| --- | --- | --- |
| Total undiscounted savings, 15 years | $25,168 | Twice the cost, before any adjustment |
| Present value at 6% | $15,746 | What that stream is worth today |
| Net present value | $3,246 | Value added over the $12,500 spent |
| Internal rate of return | About 9.5% | The return the project earns |

> **The comparison that actually decides it** — A 9.5% return, effectively tax-free because a saving is not income, against your alternative. If the money would otherwise sit at 4% in a savings account, this is a good project. If it would otherwise pay down a 7% mortgage, it is marginal. If it comes from an 18% credit line, it is a bad one.

Tool: [Try the solar payback calculator](https://dothecalculation.com/calculators/solar-payback-calculator) — Run the same structure on a solar installation, with escalation and degradation handled explicitly.

## Where the estimate really goes wrong

Arguing about discount rates is arguing about the second decimal place. The inputs that swing the answer by years are further up the sheet.

**Sensitivity of the 11.4-year discounted payback**
| Change | New discounted payback |
| --- | --- |
| Energy saving 20% lower than modelled | 15.2 years, past the equipment life |
| Energy saving 20% higher | 9.1 years |
| Installed cost $2,000 higher | 13.6 years |
| Rebate not received | 13.6 years |
| Escalation 0% instead of 3% | 14.2 years |
| Escalation 6% instead of 3% | 9.8 years |

The saving estimate is the fragile one. Modelled savings assume the building performs as specified and the occupants behave as before, and neither is reliably true. Homes that get cheaper to heat often get heated more, which is a real and well-documented effect that shows up as an underperforming retrofit.

Tool: [Try the home insulation savings calculator](https://dothecalculation.com/calculators/home-insulation-savings-calculator) — Compare envelope improvements against equipment upgrades, which usually pay back faster.

## What none of these methods tell you

- Whether the equipment lasts 15 years. A compressor failure in year ten turns a positive net present value negative, and no payback figure carries that risk.
- What the old system would have cost. If the furnace was going to need replacing in three years anyway, the correct comparison is the incremental cost over a like-for-like replacement, not the full installed price. This usually improves the answer substantially.
- The effect on property value, which for some upgrades exceeds the energy saving and is realised only on sale.
- Non-financial benefits: comfort, air quality, noise, and not having a combustion appliance in the house. Some people would pay for these independent of any payback.
- Future policy. Rebates, carbon pricing, and fuel taxes can all move within the equipment life and are not forecastable.
- Grid and fuel price divergence. The calculation assumes electricity and gas prices escalate together, and if they do not, the answer moves sharply in one direction or the other.
- Whether you will still own the property. A 11.4-year payback on a house you sell in year four is a decision about resale value, not about energy.

**Which payback number should I trust on a quote?**

Ask which assumptions produced it. A quoted payback with no stated escalation rate and no discount rate is a simple payback, which is the most optimistic of the standard methods. Ask for the annual saving estimate and recompute it yourself at a discount rate that matches what your money would otherwise do.

**What discount rate should a household use?**

The rate on whatever the money would otherwise do. Paying off a 6.5% mortgage means a 6.5% discount rate. Cash earning 4% in a savings account means 4%. Borrowing at 12% to fund the work means 12%. There is no single correct figure, and the honest thing is to state which one you used.

**Should I include the rebate in the cost?**

Yes, subtract it, but only once you are confident of receiving it. Many rebates are conditional on installer certification, equipment model, income, or an application deadline. The sensitivity table above shows losing a $2,000 rebate costs 2.2 years of payback, which makes it worth confirming before signing.

**Is payback period even the right metric?**

It is a useful risk measure and a poor value measure. A short payback means less exposure to equipment failure and to your own change of circumstances. But it says nothing about the value delivered after break-even, which is why net present value should sit alongside it rather than behind it.

**Why did my actual savings come in below the estimate?**

The three usual causes are a modelled rather than measured baseline, a milder or harsher season than the model assumed, and behaviour change after the upgrade. Compare against weather-normalised consumption over a full year before concluding the equipment is underperforming.

**Does a 9.5% return on an energy upgrade beat investing the money?**

It is competitive, and it has one genuine advantage: the return arrives as a reduced bill rather than as taxable income, so it needs no adjustment for tax. Against that, it is illiquid and it depends on assumptions about energy prices fifteen years out.

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_Source: [Do The Calculation](https://dothecalculation.com/blog/green/simple-vs-discounted-payback-energy-upgrades). Quote freely with attribution and a link to this page._