When you are investing, particularly in a building, there are always variables. The more information you have on those variables and how they affect your return on investment, the more wisely you can make necessary decisions. The good news is… window film is no different.
Most of us are familiar with the term “return on investment”. It’s often referred to in the professional realm as ROI. This equates to the profit you can expect to receive from the addition that you made to your business. That addition could be a service or something tangible like a new machine to increase production. Will it yield revenue? Will the results be worth the expenditure? Is there a better place where those funds could be allocated to? These are the minute details that can make or break a successful business.
To begin, the minimum acceptable rate of return, (MARR) is the minimum rate of return on a project a manager or company is willing to accept before starting that project, considering its risk and the opportunity cost of forgoing other projects. The term opportunity cost is the evaluation of loss regarding potential gain from other avenues if this specific option is chosen. Now that we have covered the baseline for rate of return, we can progress to the subject at hand.
There are three forms we commonly use to assess the return on investment for building owners when we quote applications. We have explained each below:
Simple payback is defined as the number of years when money saved after the implementation will cover the investment. This is the most straightforward and commonly used method when assessing a window film opportunity. However, it isn’t the full spectrum of benefits for your bottom line.
Some business owners prefer this approach as it streamlines the project assessment and allows them to have peace of mind without delving to deeply into “the numbers”. For CFOs (Chief Financial Officers), a bit more detail is commonly desired.
Internal rate of return
The internal rate of return (IRR) is a metric used to estimate the profitability of potential investments. It’s important to understand that IRR is not the actual dollar value of the project. Instead, it is the annual return that makes the net present value (NPV) equal to zero. This is the most detailed assessment of how that investment affects your business long term.
Generally speaking, the higher an internal rate of return, the more desirable an investment is to pursue. The internal rate of return is a discount rate that takes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis. This allows the investor to see the many ways in which the investment will impact the company’s overall profit margin.
Net Present value
The net present value of an investment is the project cost plus the depreciation of, (often over a period of years), the taxes saved or incurred, and in the case of implementing window film – the decrease in electrical cost. It’s an evaluation that extends from the present moment over the course of many years. Thus, showing what value that the investment is bringing, and will be bringing to the business long term.
Interestingly, the faster the investment depreciation schedule, the better the financials are for that investment. The reason being — the financial depreciation of the investment improves the profit margin for the business. However, there are state and federal stipulations regarding depreciation. You often have to take those deductions in portions, over several years. Some scenarios require upward of ten years.
ROI for window film
In the case of applying window films to an office building, the longer the warranty, the higher the value of the building. Because that investment is essentially ensured, the building owner has, in fact, increased the building’s value long term.
In general, when comparing investment options with additional relevant circumstances, the investment with the highest IRR is typically considered the best and most beneficial. For those that like to keep it simple, you can expect for your window film investment to pay for itself in three to five years. However, if you delve in a little deeper, you may find that it is sooner in the process, and more monetarily extensive than you may have imagined.
An additional variable in these financial evaluations includes the social costs of greenhouse gases. That is another blog in and of itself. If you would like more detail on how to break down those figures, you can read about it here.