SIR, BCR and Discounted Payback: Completing the Toolkit

Over the last two parts you met net present value and internal rate of return. Those are powerful, but on their own they can still mislead — a high IRR on a tiny project, or an NPV that hides how long your money is tied up. This part adds the last three tools to your kit: discounted payback, the savings-to-investment ratio (SIR) and the benefit-cost ratio (BCR). Then it does the most important thing of all: it shows you when to use which, because no single number tells the whole story.

We will use one running example so the numbers connect. Imagine a chiller-optimisation retrofit in a Klang Valley office building:

- Capital cost (capex): RM100,000, spent up front
- Annual energy savings: RM30,000/year (at a blended commercial rate of RM0.50/kWh)
- Project life: 5 years
- Discount rate: 8% (the building owner's cost of capital)

If the difference between kW and kWh, or how a saving even shows up on a bill, still feels fuzzy, park this and read Power vs Energy: kW and kWh explained first — everything below assumes you are comfortable turning saved kWh into saved ringgit.

Discounted payback: the honest clock

You already know simple payback — capex divided by annual savings:

$$\text{Simple Payback} = \frac{100{,}000}{30{,}000} = 3.33 \text{ years}$$

The flaw is that it pretends a ringgit saved in Year 5 is worth exactly a ringgit today. It is not. Discounted payback fixes this by discounting each year's saving before adding it to the running total. It is the first year in which the cumulative discounted cash flow turns positive:

$$\text{Discounted Payback} = \text{smallest } n \text{ such that } \sum_{t=1}^{n} \frac{S_t}{(1+r)^t} \ge C_0$$

Here \(S_t\) is the saving in year \(t\), \(r\) is the discount rate (8%) and \(C_0\) is the capex. Let us build the table year by year. Each year's saving is divided by \((1.08)^t\), then we keep a running total starting from the −RM100,000 we spent on day one.

The cumulative column crosses zero somewhere between Year 4 and Year 5. Interpolating (RM636 still to recover, RM20,417 arriving in Year 5):

$$\text{Discounted Payback} = 4 + \frac{636}{20{,}417} \approx 4.0 \text{ years}$$

So the same project pays back in 3.3 years on a simple basis but 4.0 years once you respect the time value of money. Discounted payback is always longer than simple payback — if it ever came out shorter, someone made an arithmetic mistake. Use it when a lender or a cautious owner wants a payback figure but you refuse to flatter the project.

Notice the bonus: the final cumulative figure, +RM19,781, is the project's NPV. Discounted payback and NPV are two readings off the same instrument.

SIR: the ESCO and government standard

The savings-to-investment ratio asks a clean question: for every ringgit of capital I put in, how many ringgit of savings do I get back in today's money?

$$\text{SIR} = \frac{\text{PV of energy savings}}{\text{PV of capital cost}}$$

We already have both pieces. The present value of five years of RM30,000 savings at 8% is the sum of the discounted-saving column above:

$$\text{PV of savings} = 27{,}778 + 25{,}720 + 23{,}815 + 22{,}051 + 20{,}417 = \text{RM119,781}$$

The capex is spent today, so its present value is simply RM100,000. Therefore:

$$\text{SIR} = \frac{119{,}781}{100{,}000} = 1.20$$

An SIR of 1.20 means every RM1 invested returns RM1.20 in discounted savings — a modest but genuine win. The widely used thresholds, which are the ESCO and government convention for ranking energy projects, are:

- SIR > 1 — attractive; the project returns more than it costs
- SIR > 2 — very good
- SIR > 3 — excellent

Our retrofit at 1.20 clears the bar but would sit near the bottom of a competitive grant queue. Energy performance contractors love the SIR because it is a ratio — it puts a RM100,000 project and a RM2,000,000 project on the same scale, and because it counts only metered energy savings, it is hard to inflate with soft benefits. When you apply for a government efficiency grant or negotiate a shared-savings ESCO contract in Malaysia, the SIR is very often the number on the form.

BCR: when the savings aren't only on the electricity bill

The benefit-cost ratio looks almost identical:

$$\text{BCR} = \frac{\text{PV of all benefits}}{\text{PV of all costs}}$$

with the same accept rule — BCR > 1 means go ahead. The crucial difference from SIR is the word all. The SIR is usually energy-only; the BCR lets you count non-energy benefits — comfort, productivity, health, avoided maintenance, tenant retention, carbon value — provided you can defend a number for each.

Suppose the chiller retrofit also cuts maintenance callouts worth RM8,000/year because the plant runs cooler and cycles less. The present value of RM8,000/year for five years at 8% (using the annuity factor 3.9927) is:

$$8{,}000 \times 3.9927 = \text{RM31,942}$$

Now total benefits are the energy savings plus the maintenance saving:

$$\text{PV of all benefits} = 119{,}781 + 31{,}942 = \text{RM151,723}$$

$$\text{BCR} = \frac{151{,}723}{100{,}000} = 1.52$$

The same project that scored SIR 1.20 scores BCR 1.52 once you count the maintenance benefit. Neither number is "wrong" — they answer different questions. The SIR tells the grant officer how efficiently public money buys energy savings; the BCR tells the building owner how good the whole deal is. Just never quietly slip productivity or comfort into an SIR to make it look better — that is the fastest way to lose credibility with a technical reviewer.

A word of caution on non-energy benefits: they are real but soft. A RM8,000 maintenance saving you can trace to fewer service tickets is defensible; a five-figure "productivity uplift" from a half-degree comfort improvement is a guess dressed as data. Count what you can measure, footnote what you cannot, and let the reader see the difference. The multi-domain metering behind a platform like CobiNeural helps here, because when comfort and water and energy are all logged against the same clock, some of those "soft" benefits stop being guesses and start being trends.

The decision table: right tool, right audience

You now hold six indicators — simple payback, discounted payback, NPV, IRR, SIR and BCR. The mistake beginners make is treating them as rivals, arguing over which is "correct". They are not rivals; they are lenses. Here is when to reach for each.

Read it as a workflow, not a menu. Screen a long list of ideas with simple payback to throw out the obvious non-starters. Rank the survivors with NPV, because NPV alone respects both time and absolute size. Translate the winner into IRR when you walk into the CFO's office, because a percentage return against the company's hurdle rate is the language finance speaks. Reframe it as SIR when you fill in a grant form, and as BCR when the value is not only on the meter. Same project, four honest faces for four audiences.

Five pitfalls that quietly wreck an analysis

Even with the right tools, the same mistakes recur. Watch for these:

1. Comparing IRRs of unequal projects. A 40% IRR on a RM20,000 lighting swap is not "better" than a 15% IRR on a RM2,000,000 chiller plant — the big project may create far more NPV in ringgit. IRR ignores scale; never rank on it alone.
2. Using payback by itself. Payback is blind to everything that happens after the payback year. A project that pays back in 2 years then dies, versus one that pays back in 3 years then saves for a decade — payback flatters the wrong one.
3. Ignoring energy-price escalation. If you assume RM0.50/kWh stays flat for ten years while tariffs and maximum-demand charges climb, you understate every future saving and make good projects look mediocre.
4. Forgetting carbon value. As carbon pricing and reporting spread, avoided emissions carry real ringgit weight. Leaving them out is not "conservative" — it is incomplete.
5. Not documenting assumptions. The discount rate, the electricity price, the project life, the escalation rate — write them down, on the page, every time. An analysis whose assumptions are invisible cannot be checked, defended or reused. If you are unsure your saved-kWh figure is even solid, revisit how electricity meters work before you build a business case on top of it.

The takeaway

Discounted payback gives you an honest clock; SIR tells you how hard your capital works per ringgit of energy saved (>1 attractive, >2 very good, >3 excellent — the ESCO and government yardstick); and BCR widens the lens to comfort, maintenance and carbon. But the real lesson is the decision table: no single number tells the whole story, so match the metric to the audience. Screen with payback, rank with NPV, sell with IRR, apply for grants with SIR, and argue multi-benefit projects with BCR.

Next, in Part 11 — The Complete Business Case, we assemble every one of these indicators into a single worked capstone project, so you can see the full toolkit pointed at one real decision at once.