A person or business uses the savings-to-investment (SIR) ratio to determine whether the potential savings of a project justifies the initial investment. For example, if a laundromat owner is considering switching to energy-efficient washing machines in his laundromat, the SIR would help him determine whether the increase in savings associated with switching to energy-efficient washing machines justifies the cost of replacing the existing washing machines. The SIR is especially useful when evaluating two different design options.
Determine the total cost of the project. For example, if you want to replace 30 washers in your laundromat with energy-efficient washers and energy-efficient washers cost $700 a piece, the total cost of the project would be (30 x $700) = $21,000.
Determine the useful life of the asset. The useful life is the estimated period of time an asset will be useable and able to provide a service or produce revenue. Continuing with the same example, assume that the useful life of the energy-efficient washers is four years.
Determine the annual increase (or decrease) in savings associated with the project. Continuing with the same example, assume that you would save $400 a year in energy costs by replacing 30 of your existing washing machines with energy-efficient machines.
Multiply the useful life of the product by the savings per year associated with the project. Then divide the result by the total cost of the project. Continuing with the same example, you would calculate as follows: (4 years x $400)/$21,000 = .076.
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