An investment proposal
March 13, 2012
First, credit where credit is due. I read Mike the Mad Biologist. His post pointed me here, which mentioned an atrociously written Washington Post article (bad arithmetic, erased without comment, then corrected, with no reflection of the vastly different results in the text). This got me to think about buying efficient light bulbs as an investment, and so I did some interest calculations, as if the bulb were paying a mortgage.
I’ve long been interested in LED lighting, and have installed some myself in places where it was a clear win (underneath cabinets and on bicycles). I’ve been wary of “LED light bulbs” for some time, because to be fair, diplomatic, and objective, up till now, most of them have been overpriced crap. But last weekend or so, I was at the Home Despot, saw some LED light bulbs, read the labels, decided that it was worth my while to try one of them. I got a 14 watt bulb claiming to be the equivalent of a 75W bulb, installed it, and so far, so good — it’s bright, good color temperature, and instant-on, as expected. Lifetime is TBD; claims to have a 5 year warranty (but did I save the receipt? Whoops, need to remember to do that when I buy more), also claims to have a 25000 hour life, which is reasonable for LEDs. Also claims to be dimmable, but the reviews consistently say “no, not really, not like you’d expect”.
So, if I view this bulb as an investment, what is the rate of return? Let’s benchmark it against an incandescent bulb, since that is what the Post did. I initially decided to assume that I was saving 60 watts per bulb (15 instead of 75), running it 6 hours a day, and paying $.12/kwh for electricity (actually, I pay $.15, I just checked last month’s bill). Electricity savings come to about $1.30 per month.
Assume, also, that an incandescent bulb costs a dollar, and has a lifetime of 1500, so include the cost of the bulb in each month’s savings. At 6 hours per day, the bulb savings are 12 cents per month. Total savings are $1.42/month.
Assume the bulb will last 10 years (21600 hours at 6/day). I paid $30 for the bulb, plus sales tax, rounded up, is $32.
So, supposing I made an investment of $32, and it paid me back $1.42 per month for 120 months, at which point, no more payments, just as if I were loaning money to someone else for an itty-bitty mortgage. Spreadsheets have a “RATE” function that will determine the interest rate given a present value, future value, payment amount, and number of payments; in this case, -32, 0, 1.42, and 120. And out pops 4.4 percent. Not very exciting, though it helps that it is free of taxes, since it is money saved, not money earned. And if you only ran a bulb 3 hours a day, and only saved 45 watts, and only paid $.10 per killowatt hour, only 1.2%. That’s not much of an investment, is it?
But those interest rates are PER MONTH, not per year. So really, 1.2% — that’s 14.4% return, per year, tax free. If you return to the original assumptions, the $32 investment in an LED light bulb pays out at 52.8% per year.
What’s the risk in this investment? I see three possible risks that could cause it to fail to pay out.
First, you can only save money that you have; if you go bankrupt, then it’s not interesting that you aren’t paying money to the electric company, because you’re already not paying money to the electric company. However, all investments are vulnerable to bankruptcy risk.
Second, electricity in the next few years could become incredibly cheap (pigs could fly, too).
Third, the bulb could fail. Obviously, it pays to save your receipt; that gives you insurance of some sort for up to 5 years. If the bulb fails in five years instead of lasting ten, then the payout is not as impressive. If electricity is too cheap, or if you don’t run the bulb enough hours per day, it won’t pay out (3 hours per day, $.10/kwh, 45 watt savings, 5 years, will not pay off). But, if a bulb is on even 4 hours a day at $.10/kWH, the interest rate is 7.4%, or 3 hours at $.12/kWH, is 5%. Where I live with $.15/kWH electricity, 3 hours a day, 45 watts less, failing at 5 years, pays off at 14.8%. At 6 hours a day, 45.8%. I really like the idea of an investment that pays me 14.8% annual interest, tax-free, when it “fails”.
Did you notice that the Washington Post thought it was more important to tell you about the terrible government-subsidized light bulbs, when they could have been giving you this useful information instead? Says something about their priorities, doesn’t it? Hard to believe that anyone would think time spent reading that would be well-spent.