Time Value of Money

As a business/property owner, your time is just as valuable as your money.  When making investments, it is natural to look at the return on investment and if the investment will make (or save) money. The same is true with a roof. Let’s go back to the basics. You have $10,000 right now. Do you just keep the money or do you invest it?  If you invest it, the future value increases through interest earned over a set period of time. Suppose the money is invested for one year at a simple interest rate of 3.5%.  At the end of the first year, you have earned $350 in interest, providing you with $10,350 instead of $10,000. Suppose this amount is invested over 20 years as part of a long-term goal, at the end of the term the future value of the initial $10,000 will be roughly $17,000. The money has almost doubled.  So, in this instance, one could argue it is better to wait for the larger payout.

Both similarly and conversely that is the premise of investing in building components. A good value is essential. Often, the lowest bid seems to be the optimal choice. However, like the example above, sometimes the lowest price (or best offer) now may not be the best choice for the long term. Let’s use a roof recovery as an example. A building owner has two options. Option A and Option B.

Option A Option B
Roof Product Cost $75,000 $90,000
Installation (Labor + Overhead) $50,000 $45,000
Tear-Off and Disposal Costs $12,500 $0 (in most instances)
Maintenance * $5,000 $1,500
Repair * $7,500 $0
Energy Savings * 0 $84,000**
Life Cycle Cost $150,000 $52,500
*estimated for 20 years               
**estimated costs and energy savings are from manufacturer, actual numbers will vary based on consumption, energy market, geographic location, tax savings where available, state and local energy rebates, etc.
 

While Option A may have a lower initial cost, over the course of 20 years this roof costs nearly $100,000 more than Option B. After an analysis and using the basic investment principle of time value of money, it is more beneficial to pay roughly $15,000 more for materials to save $100,000.  This is especially interesting when one considers the $15,000 is actually saved through lower installation costs and the elimination of tear-off costs. This type of life-cycle cost analysis is  strongly encouraged prior to any major purchase. Your accounting or finance professional can assist with these decisions.

For pros and cons of roofing systems, ask LaFerney Commercial Roofing.

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