Hail to the Bean Counters

I was reading a story about a program starting up to supply the City of Chicago with a batch of 400+ solar-power trash compactors for public areas downtown, when I noticed that there had been some resistance to the program on the principles that these new units cost money, that the city already has a massive budget problem, and that solar-powered trash-compactors are a funny-sounding idea in the first place. All of these objections are stupid, of course; a similar project in Philadelphia is saving the city an estimated $900,000 a year (or enough to pay for the compactor units in less than three years); on a seven-year replacement cycle these things should provide a boost for the budget in four and a half of the seven, and trash compactor units cut down on how often you have to empty the trash cans, saving labor hours and fuel for the garbage truck, while solar-powered compactors don’t need expensive wiring or expensive electricity to work. But, of course, none of that is really the point…

You can find the original story from The Chicago Sun-Times here if you want to, but the key point here was never really about trash collection. We have similar machines in use on campus at MSU, and they’ve worked out rather well despite the harsh Michigan climate; there is also plenty of data from other cities that have used this technology to support the idea that these devices will not only pay for themselves but actually save the city money over the course of their operational lifespan. The issue is politics – and the fact that it is almost always easier to run around shouting (or printing inflammatory articles) about anything that does not suit your agenda than it is to actually think about it, let alone make a coherent case. It’s not easy to tell a cash-strapped city to spend money on anything in order to make money later – but that is generally how it works…

People have a tendency to look at the “break even” point when they consider an investment – how long will it take to make back what we’re going to spend? This isn’t a good measure, however; I’d rather have an investment that didn’t pay off for five years and then made a few million dollars extra than a project that paid for itself in a few weeks and then never made another dime. Return on investment (ROI) is a better measure, because it considers how much you will actually make over the life of the project, not just when you will get back to a zero-sum balance. Most financial analysts will tell you that the net present value (NPV) calculation is the best one to use; this considers the interest rate, the cost of capital, risk factors, how much you will eventually make on the project, and even what you could have made if you’d done something else with the money, and gives you a simple calculation: how much money will you have at the end of the project for each dollar you invest now?

I won’t bore you with the details of how to do an NPV calculation; there are automatic NPV calculators available online if you want to try this (or you will find the function on any HP12 or HP17b Financial calculator). My point in filling your ear with this rant is that all too often you will hear people expressing shock or outrage at fiscal expenses they fell are irresponsible, when the truth is that they’re looking at the wrong measurement of the project. Solar-powered trash compacting trash cans may sound silly on paper, and spending $2.5 million on them may seem reckless, but in the long run they appear to make more sense than the alternative – and the people who are railing against them are simply displaying their ignorance – or their political agenda…