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Understanding ROI



At Take Three, we are often extolling the values and benefits of LED lights and how they can help save you money. Itís all about saving energy, saving money, and yielding a maximum return on your investment, we say.

Ok, youíre thinking. Thatís great and all, but what does it really mean?

What is ROI?

Investing in LED lighting is not a decision to be taken lightly. Whether youíre retrofitting/upgrading an existing building or working on new construction, there are costs involved that need to be weighed. LEDs cost more upfront, plain and simple, and those costs need to be justified over the long run. Saying an LED fixture consumes less energy is one thing, but you need to be able to pinpoint HOW MUCH MONEY it will save you and WHEN it will pay for itself. If you or your client are going to invest in an LED lighting solution, you need to know there is a good return on it, and that it is worth the money.

So letís dive into how to figure out your Return on Investment for your project.

What factors should I consider when determining LEDs ROI?

LEDs have many benefits that include excellent light output, great color rendition, and the lack of any harmful or toxic chemicals (unlike fluorescent lamps). While there are potential monetary values to these benefits, such as better workforce productivity from excellent light levels, we are going to ignore these for the purposes of determining ROI and stick to more measureable statistics.

Determining your ROI comes down to two concepts:
  • Energy Savings: Using less energy reduces your electrical bill. Simple.
  • Lifetime & Relamping: This one is often overlooked. How long will an LED fixture last vs. a comparable fixture? There is a definite cost to replacing lamps in older fixtures vs. an LED that keeps on ticking. But the issue is not just the cost of the replacement lamps. It is the cost of labor to replace those lamps. How many man-hours will be spent on replacing lamps in your facility over a year?
The goal is to determine at what point the SAVINGS that the LED solution provides surpasses the COST of the LED solution. For retrofit projects, you are looking to justify the entire cost of the LED solution; for new construction projects, you are looking to justify the cost difference of the LED solution over the baseline standard. This is the point that the LEDs have provided a return on your initial investment, and have essentially paid for themselves. This is also known as the payback period. Typically, the benchmark ROI of 100% equates to a payback period of one year.

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Case Studies

Sometimes the quickest way to see how it works and how it all comes together is just to dive right in with some real values. So letís do just that!

Case Study #1 - Retail Retrofit

Case Study #2 - Educational New Construction

Case Study #3 - Warehouse Retrofit

Case Study #4 - Exterior Flood Light New Construction

#1 - Retail Retrofit

Your client has a small retail store that has 25 incandescent downlights that they are looking to retrofit with something more efficient. Each downlight has a 6Ē can with an incandescent 65W BR30 lamp. Each lamp costs $1.99 and is rated for 2,000 hours. You are proposing 6Ē LED retrofits to your client. They will use the existing housing and each module costs $39.00, uses 9.7 watts, and is rated for 35,000 hours.

So letís compile some numbers before we start calculations. First, the electrical figures:

Number of luminaires 25
Existing watts per fixture 65 watts
Cost of existing fixtures $0 (They're existing after all)
Cost of replacement lamps for existing system $1.99
Existing system lifespan 2,000 hours
Proposed LED watts per fixture 9.7 watts
Proposed LED cost per fixtures $39.00
Proposed LED system lifespan 35,000 hours


Now letís add in some energy and labor figures:

Hours per day system is in use 8 hours
Days in use per year 365
Average energy rate $0.11/KwH
Average labor rate for maintenance $20.00/hour
Number of workers needed to replace all lamps 1
Hours it will take (per worker) to replace all lamps 2 hours


Ok, thatís quite a few figures to tally up, but now letís enter them into the calculator and see what we find:
  • Based on energy savings alone, the LED system will save $444 per year on the electric bill over the current incandescent system.
  • Based on energy savings alone, the LED system will recoup its cost in 2.2 years, thatís a 46% ROI. (1 year being 100%)
  • Factoring in relamping and labor costs, the LED system will save your client $4,775 over a 10 year period.
  • Factoring in relamping and labor costs, the LED system will recoup its cost in just over 20 months, yielding a 59% ROI.
As you can see, while looking at only the saving on the electrical bill gives a good ROI, looking at the complete picture by taking into account maintenance costs increases the true ROI by 30% over the simple ďenergy-onlyĒ model. So even though the proposed LED system costs almost $1,000 to purchase, the savings on the monthly electric bill coupled with the savings from not having to relamp the fixtures constantly quickly covers that upfront cost. And after the 20-month payback period, your client is just saving money hand over fist to the tune of $575 per year.

Ok, thatís pretty good. Letís look at another example.

#2 Ė Educational New Construction

Your client, a university, is building a new wing onto one of their research buildings. With the abundance of corridors, classrooms, and laboratories, there are going to be a large quantity of 2x4 lay-in fixtures in acoustical suspended ceilings; 300 luminaires total. The most common 2x4 fixture type is usually going to be a fluorescent troffer, but could an LED alternate provide enough savings to make it worthwhile in the long run? Letís compare.

The reference standard fluorescent troffer specified uses four 32-watt T8 lamps each. The T8 lamps costs $2.50 each, and are rated for 20,000 hours. The troffer housing itself is $62.00.

The LED alternate is a 2x4 high-output lay-in with 5500 lumens of output. It costs $249.00 per fixture, uses 53 watts each, and is rated for 50,000 hours.

So letís compile some numbers before we start calculations. First, the electrical figures:

Number of luminaires 300
Baseline watts per fixture 128 watts (32W x 4)
Cost of baseline fixture housing $62.00
Cost of lamps for baseline system $10.00 ($2.50 x 4)
Baseline system lifespan 20,000 hours
Proposed LED watts per fixture 53 watts
Proposed LED cost per fixtures $249.00
Proposed LED system lifespan 50,000 hours


Now letís add in some energy and labor figures:

Hours per day system is in use 12 hours
Days in use per year 250 (closed weekends and holidays)
Average energy rate $0.14/KwH
Average labor rate for maintenance $30.00/hour
Number of workers needed to replace all lamps 4
Hours it will take (per worker) to replace all lamps 25 hours


Ok, thatís quite a few figures to tally up, but now letís enter them into the calculator and see what we find:
  • Based on energy savings alone, the LED system will save $9,450 per year on the electric bill over the baseline fluorescent system.
  • Based on energy savings alone, the LED system will recoup its increased cost in 5.62 years, thatís an 18% ROI. (1 year being 100%)
  • Factoring in relamping and labor costs, the LED system will save your client $50,400 over a 10 year period.
  • Factoring in relamping and labor costs, the LED system will recoup its increased cost in 5.13 years, with a 19.5% ROI.
Linear fluorescent fixtures are certainly a workhorse of the commercial lighting industry. They are fairly efficient and have a fairly long lifespan. Yes, LED can best them in both those areas, but the increase in upfront investment is where you need to run the numbers. What this example tells us, with a 19.5% ROI, is that it will take 5 years for the LED system to justify its upcharge over the cost of the baseline fluorescent troffer system. But after that 5-year payback period, your clientís bottom line is benefiting from a $9,000 annual savings in electricity costs.

Now, letís factor in something else: Energy Rebates. By looking to your local utilities, your client may qualify for some incentives for using energy-efficient lighting, and we strongly recommend looking into this. For this example, letís assume the local utility will give your client a rebate of $50 per LED fixture. Additionally, they could also get $8.40 for each fluorescent fixture ($5 per housing and $0.85 per lamp), as fluorescent fixtures are energy-efficient too, after all. With these rebates factored it, the ROI for the LED system jumps from 19.5% to 25.1%, and the payback period drops from 5.13 years to less than 4 years. That is a 29% increase in ROI just from working with the local utility!

Mileage will certainly vary based upon what the local utilities and governments are offering, but you should always look into them, especially when working on a large project. It can be the deciding factor, taking an LED system from ďalmost worth itĒ to ďdefinitely worth itĒ.

#3 Ė Warehouse Retrofit

Your client has a 20,000 square foot warehouse with 35 foot ceilings that currently has fifty 400-watt metal halide high-bay light fixtures. The amount of money they are spending on electricity has caused them to look for better options. You propose an LED alternative. Not only is it more efficient on energy use, but the fact that all the light output from an LED fixture is pointed towards the floor surface, and not wasted pointing in the opposite direction, means that it does not need to output the same number of lumens as the 400-watt metal halide fixture. You find a comparable LED fixture that cost $480 each and only uses 160 watts.

Though many MH bulbs are rated for a 20,000-hour lifespan, they will often lose half their light output by 50% of that lifespan. So weíre going to use a 10,000-hour life in this example to be more realistic with replacement rates. Additionally, a 400-watt metal halide bulb will actually use around 458 actual watts.

So letís compile some numbers before we start calculations. First, the electrical figures:

Number of luminaires 50
Existing watts per fixture 458 watts (450W MH actually uses 458W)
Cost of existing fixtures $0 (They're existing after all)
Cost of replacement lamps for existing system $8.00
Existing system lifespan 10,000 hours
Proposed LED watts per fixture 160 watts
Proposed LED cost per fixtures $480.00
Proposed LED system lifespan 50,000 hours


Now letís add in some energy and labor figures:

Hours per day system is in use 12 hours
Days in use per year 365
Average energy rate $0.13/KwH
Average labor rate for maintenance $25.00/hour
Number of workers needed to replace all lamps 2
Hours it will take (per worker) to replace all lamps 8 hours


Hereís what we find:
  • Based on energy savings alone, the LED system will save $8,484 per year on the electric bill over the current MH system.
  • Based on energy savings alone, the LED system will recoup its cost in under 3 years, with a 35% ROI. (1 year being 100%)
  • Factoring in relamping and labor costs, the LED system will save your client $69,500 over a 10 year period.
  • Factoring in relamping and labor costs, the LED system will recoup its cost in under 2.7 years, yielding a 37% ROI.
High output light sources like HID and sodium vapor have long been a staple for high-bay fixtures in large open space like warehouses, gymnasiums, and factories. But they consume an awful lot of energy. With an LED high-bay fixture you can save considerable amounts of money on your electric bill that will quickly offset the cost of the fixtures themselves. In this case, the payback period is under 3 years. After this, your client is pocketing nearly $9,000 of extra cash flow every year.

And that is not factoring in ENERGY REBATES! We strongly encourage you to look to your local utilities and municipalities for rebates and incentives they may have to help you offset the cost of upgrading equipment. In this warehouse example, if the local utility were offering a rebate of $50 per LED fixture, the total ROI would increase from 36.8% (2.7 year payback) to 41.1% (2.4 year payback). Thatís a 12% increase in ROI just from working with your local utility!

Again, actual rebates and incentives will vary based upon what the local utilities and governments are offering, but itís always worth looking into.

#4 Ė Exterior Flood Light New Construction

Your client is installing 30 exterior floodlights around the perimeter of their new building in order increase its visibility from the street. Their default fixture was going to be a 150W metal halide floodlight; itís cheap and will get the job done. You want to propose a slightly more expensive LED version in order to save them money in the long run and find a 45-watt fixture that you can get for $275.

So letís plug in the numbers and see what we find. First, the electrical figures:

Number of luminaires 25
Baseline watts per fixture 185 watts (150W MH actually uses 185W)
Cost of baseline fixture housing $138.00
Cost of lamps for baseline system $10.00
Baseline system lifespan 10,000 hours
Proposed LED watts per fixture 45 watts
Proposed LED cost per fixtures $275.00
Proposed LED system lifespan 50,000 hours


Now letís add in some energy and labor figures:

Hours per day system is in use 12 hours
Days in use per year 365
Average energy rate $0.13/KwH
Average labor rate for maintenance $25.00/hour
Number of workers needed to replace all lamps 1
Hours it will take (per worker) to replace all lamps 3 hours


Hereís what we find:
  • Based on energy savings alone, the LED system will save $2,391 per year on the electric bill over the current MH system.
  • Based on energy savings alone, the LED system will recoup its cost in 1 year 7 months, thatís a 63% ROI. (1 year being 100%)
  • Factoring in relamping and labor costs, the LED system will save your client $21,747 over a 10 year period.
  • Factoring in relamping and labor costs, the LED system will recoup its cost in under 18 months, with a 67% ROI.
With a 67% ROI and a super-quick payback period of under 18 months, the LED alternative is the clear winner here. And if there are energy rebates or incentives available from your clientís local utility, the LED payback will be even quicker and the savings even greater.

Value for Your Money

Understanding the ROI of an investment in LED lighting is vital to making sure you, and your client, are getting a good value for your money. The numbers need to be run.

Contact Take Three today and let us work with you on your lighting project to make sure you, and your client, are maximizing your ROI.