Payback Beware: A Valuable Antique or An Old Remnant in the Decarb Era?

For decades the maritime field has relied upon Payback as the initial litmus test for determining the economic viability of an investment to improve performance. This document describes the shortcomings of Payback in the environmental era and why it should be discarded in favor of traditional Free Cash Flow. INTRODUCTION For decades the maritime field has relied upon Payback as the initial litmus test for determining the economic investment viability of an investment aiming at improving performance. This paper will demonstrate that Payback is not a valuable antique, but rather an outdated metric that should be discarded in this new era of environmental themes and decarbonization. Payback Practice The general form of the equation for Payback: The general form of the equation for Payback traditionally provides a quick assessment of whether an environmental efficiency improvement constitutes a worthwhile investment. It is based on an arbitrary cut-off year which serves as a hurdle for the engineering group to recommend or reject an investment. Payback fundamentally acts as a liquidity measure by answering the question, "How long before I get my money back?" Additionally, it provides a basic measure of risk, as longer timeframes represent greater risks of unforeseen complications. However, many finance professionals argue that Payback should not be considered an investment metric. Payback Shortcomings Prior to the decarbonization era, legislation remained largely unchanged for decades, allowing ships to achieve earnings throughout their useful life without major regulatory disruptions. Consequently, energy-saving devices, technologies, zeroemission fuels, and digital means for efficiency improvements came at a CAPEX premium, generating annual OPEX savings. Historically, Payback served as a simple early test to determine whether an investment was prudent or prohibitively expensive. A key criterion for Payback often overlooked is the assumption of equal revenues among alternatives, with or without the efficiency attribute. Equal vessel revenue for vessels operating on a trade route requires similar vessel speeds among alternatives (all other factors being equal). The decarbonization era has altered these key assumptions, rendering them invalid.