What the payback and discounted cash flow tool calculates
A compressed-air investment, such as a VSD compressor, a heat-recovery unit, a leak programme, a new dryer or an overhaul, should be judged against a clearly defined alternative, using the extra money it needs and the future cash it is expected to save. The tool above calculates:
- Simple payback: years to recover the investment from undiscounted net savings
- Discounted payback: years to recover it once savings are discounted
- Net present value (NPV): the value today of all future cash flows minus the investment
- Internal rate of return (IRR): the discount rate at which NPV is zero
- Sensitivity: how the result changes if savings, tariff, hours or costs differ from the estimate
None of these results proves that the equipment can deliver the required pressure, flow, air quality or reliability. That is an engineering question to settle first. The tool turns a technically sound proposal into a transparent financial comparison.
The equations
- Simple payback (years) = incremental investment ÷ annual net saving
- Present value of a cash flow in year t = cash flow ÷ (1 + r)^t, where r is the discount rate
- NPV = −initial investment + sum of present values of all future net cash flows
- Discounted payback = the year in which cumulative present value first becomes positive
- IRR = the value of r that makes NPV equal to zero
Simple payback is only a fair shortcut when savings are roughly level each year and there are no large later costs. Where a project has a ramp-up, a mid-life overhaul or a residual value, use NPV.
How to define the baseline and the options
Every saving is a difference between two futures, so the baseline must be realistic.
- “Do nothing” is not a zero-cost baseline if the existing compressor needs an airend overhaul, a dryer replacement or regular breakdown hire to keep running. Include those costs.
- If the existing plant is unsafe or cannot meet the duty, it is not a feasible option and should not appear with an attractive NPV.
- Compare options on the same service: the same pressure at the critical user, the same air quality, the same standby and the same operating hours. A lower power bill achieved by dropping standby or air quality is not a like-for-like saving.
- For mutually exclusive choices, compare each against the same baseline, then compare them with each other on their incremental cash flows. Do not add their savings together.
- For projects that interact, such as leak repair and a new VSD compressor, model them in a sensible order. Fixing leaks first changes the saving the VSD can deliver.
Which inputs matter and where they come from
| Input | Unit | Better evidence | Weaker evidence |
|---|---|---|---|
| Installed investment | Currency | Quoted equipment, installation, electrical, piping, commissioning and removal costs | Machine price only |
| Energy saved | kWh per year | Logged kW and flow before the change, with a verified method | Brochure percentage applied to the bill |
| Electricity tariff | Currency per kWh | Current tariff including demand and time-of-day components | An old average rate |
| Running hours | Hours per year | Hour meters and production calendar | “24 × 365” |
| Maintenance cost change | Currency per year | Service schedule for each option | Assumed equal |
| Major future work | Currency, year | Overhaul interval from running hours and duty | Ignored |
| Residual value | Currency, year | Realistic resale or reuse value | Purchase price |
| Discount rate | % per year | Rate agreed by the company’s finance team | Chosen to make the project pass |
Label every value as measured, quoted, contracted, estimated or assumed. The weakest material input should be tested in the sensitivity check.
Converting engineering savings into cash
Most compressed-air savings start as kilowatts. The conversion is:
Annual energy saving (kWh) = average kW reduction × operating hours per year
Example: a 90 kW average compressor load. A pressure reduction of 0.5 bar, at about 7% more power per extra bar, saves roughly 3.5%, or about 3.2 kW. At 6,000 hours a year that is about 19,000 kWh. Multiply by your tariff to get cash, and subtract any added maintenance or monitoring cost to get the net saving.
Use measured kW where you can. The power and flow logging method gives a baseline you can verify after the project. Avoid applying a brochure percentage to the whole electricity bill; the saving applies only to the compressor energy affected by the change.
Worked example A: one project, three answers
The figures below are in arbitrary money units so that you can scale them to your own currency and project size.
A project costs 100 units and saves 30 units a year, net, for eight years. The discount rate is 10%.
| Year | Net saving | Present value at 10% | Cumulative present value |
|---|---|---|---|
| 0 | −100 | −100.0 | −100.0 |
| 1 | 30 | 27.3 | −72.7 |
| 2 | 30 | 24.8 | −47.9 |
| 3 | 30 | 22.5 | −25.4 |
| 4 | 30 | 20.5 | −4.9 |
| 5 | 30 | 18.6 | 13.7 |
| 6–8 | 30 each | 46.3 in total | 60.0 |
- Simple payback: 100 ÷ 30 = 3.3 years
- Discounted payback: about 4.3 years
- NPV over eight years: about 60 units
The same project looks faster on simple payback than on discounted payback, and the NPV shows how much value it creates over its life.
Worked example B: the faster payback is not always the better choice
Two mutually exclusive options over the same eight-year horizon at 10%:
| Option | Investment | Net saving per year | Simple payback | NPV |
|---|---|---|---|---|
| A: retrofit controls and fix leaks | 100 | 30 | 3.3 years | 60 |
| B: new VSD compressor, controls and leaks | 160 | 44 | 3.6 years | 75 |
Option A pays back faster, but option B creates more value. The incremental investment of 60 units buys an extra 14 units a year, which has an NPV of about 15 units on its own. If funds are limited, A may still be the right first step; the point is that the choice should be made knowingly.
Worked example C: a later overhaul changes the answer
Suppose the baseline compressor would need an airend overhaul costing 40 units in year 3 if kept. Avoiding that cost adds to the project’s benefit in year 3. Conversely, if a proposed used machine needs an overhaul in year 5, that cost reduces its NPV and can push discounted payback beyond the point where the project makes sense. Always place major work in the year it is expected, based on running hours and duty. The overhaul versus replacement decision tool helps estimate when.
Sensitivity: which assumptions decide the result?
Vary each material input across a realistic range and note when the decision changes:
- Energy saving lower by a quarter, or higher
- Running hours lower after a production change
- Tariff higher or lower
- Commissioning delayed by several months
- Overhaul earlier than expected
- Discount rate one or two points higher
A useful output is the break-even value: for example, “the project still has a positive NPV as long as savings exceed about 19 units a year”. If the break-even sits close to the estimate, collect better evidence before committing.
Proving the benefit after the project
Agree the measurement method before the project starts: the same logging points, a comparable production period and a correction for changes in demand. After commissioning, log again and compare kWh per unit of air delivered, or specific power in kW per m³/min. The energy baseline adjustment worksheet helps separate the project’s effect from changes in production.
How Reddy Compressors helps
We provide the engineering inputs a sound financial comparison needs: power and flow logging, leak surveys, pressure-drop checks and realistic service and overhaul schedules for compressors of many brands, including ELGi, Atlas Copco, Ingersoll Rand, KAESER and Chicago Pneumatic. We are an independent multi-brand specialist, not an authorised dealer, so we can quote and compare several routes: overhaul the existing machine, buy new, buy used or refurbished, or rent while the decision is made. We have tie-ups with all major and reputed brands. We do not guarantee savings; we measure them before and after so you can see the result.
Our office is at Tarnaka, Secunderabad. Service teams cover Telangana and Andhra Pradesh, and equipment, rentals and spares are supplied across India.
What to send us
- The options you are considering and the problem they must solve
- Current compressor makes, models, running hours and recent service history
- Electricity bills or sub-meter readings for the compressor house, if available
- Production hours and any planned changes in demand
- The discount rate or payback limit your company uses, if you want us to align with it
Frequently asked questions
How do I calculate payback for a new air compressor?
Work out the extra installed cost compared with the realistic alternative, including installation, electrical and piping work. Then estimate the annual net saving: energy saved in kWh multiplied by the tariff, plus or minus any change in maintenance cost. Divide the investment by the annual net saving. Use measured kW where possible, and check whether a later overhaul or residual value changes the picture.
What is the difference between payback period and NPV?
Payback period tells you how long it takes to recover the investment, but ignores what happens afterwards and the timing of money. Net present value converts every future saving and cost to today’s value at an agreed discount rate and adds them up. A project with a slightly longer payback can have a higher NPV because it keeps saving for longer or saves more each year.
What discount rate should I use for a compressor project?
Use the rate your company’s finance team applies to similar investments, which normally reflects its cost of capital and the project’s risk. There is no universal rate for compressed-air projects. Keep the rate the same for all options being compared, and test the result at a higher rate to see whether the decision still holds. Avoid choosing a rate simply to make a project pass.
Is a VSD compressor worth the extra cost?
It depends on the demand profile. A VSD compressor saves energy where demand varies widely and a fixed-speed machine spends long periods unloaded or cycling. Where demand is steady and close to full load, the saving can be small. Log power and flow for a representative period first, then model the VSD against the actual profile rather than relying on a general percentage.
Should I overhaul my old compressor or buy a new one?
Compare both on the same service and horizon. Include the overhaul cost, expected remaining life and energy use of the old machine against the installed cost, efficiency and maintenance of a new one. Residual values and the risk of further major work matter. A discounted cash flow comparison over the same years, using measured energy data, gives a clearer answer than comparing purchase prices.
How do I check that the promised energy savings were achieved?
Agree a measurement method before the project: the same logging points, a comparable production period and a way to adjust for changes in demand. Log power and flow before the change, then repeat after commissioning. Compare kWh per unit of air delivered, or specific power in kW per m³/min, rather than the total bill, which is affected by production and other loads.
Related pages
Calculators and worked examples
These tools give indicative figures for screening, comparison and for preparing an enquiry. They run in your browser and send nothing. No prices or tariffs are assumed: enter your own to see costs. Efficiencies and other figures shown are example values: replace them with your own. Results are not a performance guarantee or a design certificate; final selection is confirmed by a service engineer against the machine data sheet and the site.
Project payback and net present value
The worked example below shows the method with fixed numbers. Turn on JavaScript to change the inputs.
Worked example
Inputs
- Discount rate (%): 10
- Life (years): 8
Result
- Result: Enter your own prices above (investment and annual saving are needed; no amounts are assumed)
Method. Simple payback = investment ÷ (annual saving − upkeep). NPV = −investment + Σ (saving − upkeep) / (1 + r)ⁿ over the life. Discounted payback is the year in which the discounted savings repay the investment; IRR is the discount rate at which NPV = 0. Enter your own figures.
What to take from it. A positive NPV at your own discount rate is a stronger test than payback alone, because payback ignores what happens after it.
Technical content reviewed by D. Srinivas Reddy, Managing Partner and service engineer, Reddy Compressors. Last updated 17 October 2026. How our engineering content is reviewed.