ROI is a consideration that is increasingly referenced by implication if not specifically mentioned in alternative energy issues. It is a tool designed to reduce uncertainty and, like other such cost/benefit considerations, it attempts to take human errors and uncertainty out of the decision-making process.
Recently, Eric Loveday compared the Honda Fit EV to its petrol counterpart. In his analysis, using the return on investment (ROI) to compare the vehicles, the EV came up wanting. But it is humans that make assumptions when using this measure. It is humans that suffer the effects of pollution. It is humans that may suffer a shortage of petroleum. And so it is humans who must decide how we should spend our funds. ROI is a formula that artificially abbreviates a problem we might have difficulty putting into words. We can use a formula but how often do we assume that ROI is an unbiased and absolute truth not requiring further clarification?
The Assumptions in ROI
The formula for ROI is relatively simple: the net benefit of an investment/cost of the investment. The net benefit is the gains less the cost. If the overall value is negative or if there are other potential investments with a higher ROI then they are recommended. This is the justification Loveday uses to compare the petrol to the EV Honda Fit. But the simplicity is also the problem. “Benefit” and “cost” must be defined — simple enough when we are only dealing with money but what about our time, risks, prestige in ownership, or simply public opinion.
While ROI is at home with financial analysis, it is often applied to other considerations. We could speak of the ROI of children. They are certainly an investment of time and money, but we don’t, because our goals are not strictly to get the highest return. Like owning an EV, we may simply want to enjoy the experience. For a long time, car advertisements have appealed to the experience and not the financial analysis of ownership. Yet when it comes to an EV, suddenly we are supposed to start considering the returns on our investment? At the least we can conclude that this view of the EV, when negative, is more like a political attack advertisement.
ROI is part of a family of Financial Management Tools, including cost-benefit analysis, payback periods, Internal Rate of Return (IRR), Net Present Value (NPV), and Economic Value Added (EVA). Each one gives us a window, or perspective, on an intangible financial situation. It is only a shorthand to describe that situation into a label: the investment, the kids, the car. It is a simplification and not an entire picture. If Loveday errors, it is in the presumption that the label of “the car” is the situation and that ROI narrowly considered is the only measure of value.
What is Not Included in ROI?
ROI is a measurement within a specific time frame. It is the return on investment within a year, the duration of the lease, or the lifetime of the vehicle. The analysis favors quick returns over stable or even sustainable ones. An owner can run both the Fit EV and the petrol EV in his garage and, according to Loveday’s calculations, the petrol EV will have a higher ROI as long as the owner survives. Carbon monoxide poisoning is outside of the scope of this ROI analysis. This is equally true of pollution in general, the political implications of depending upon foreign oil, the financial implications of our balance of payments, and the resulting national debt. But it doesn’t have to be, because all of these things are also benefits and costs. They are part of the intangible situation of owning or operating an EV.
Loveday assumes that the petrol Fit and the EV Fit are essentially the same vehicle and feels it is similar to comparing two petrol vehicles, something that is often done. Graphite, coal, coke, charcoal, lampblack, graphene, diamonds, and bucky balls are all made of the same element, but because the potential usage is so very different, they might as well be entirely different substances. The EV may look like a car, but the motor is very different.
Loveday assumes one vehicle for all situations immediately putting the EV at a disadvantage. The contrary assumption of a daily commute through several miles of stop and go traffic would put the petrol vehicle at a disadvantage. The electric vehicle excels at short distances and, for a two-car family, it often becomes the vehicle of choice. The actual intended usage, the situation, will entirely change the results.
“Garbage in Garbage Out”
If we choose to narrowly define our costs and benefits, the answer supplied by ROI will be similarly limited. The human decision process has flaws, and so we turn to guidelines like logic and formulas, but part of that process is the assumptions (human decisions) we make using an ROI metric. And so we may have only moved the flawed decision process back to the level of assumptions and gained only the appearance of certainty.
We want certainty and we need accuracy, but when our need for certainty over-reaches our desire for accuracy, we tend to accept any answer. It is the quest for certain answers that drives us to formulas, but may also bias us to eliminate or assume anything where we can’t supply a hard number. And then the ultimate mistake is to assume our final answer is somehow better than the information we originally supplied.
ROI may assume we have unlimited funds or at least a “disposable income” beyond our necessities. For many, the present commercial electric vehicles may be out of the question. A ROI analysis with assumptions different from those offered by Loveday may show another electric vehicle package, like the Leaf, a very good investment over 3 to 5 years, but it will require capital up front. Those who most need financial relief, may find that they simply don’t have enough upfront capital that will allow them to afford the cheapest long-term alternative. In this case, ROI does not supply a practical answer to the family car.
Why Do We Favor ROI Analysis?
We may have some reluctance in being critical of ROI. It seems to suggest a weak mind that can’t handle numbers. That same kind of reluctance was the subject of a story you may remember as a child: “The Emperor’s New Clothes.” No one wanted to admit there was a problem because it would reflect upon them.
Over the last 200 years, the Supreme Court has repeatedly confirmed corporations as people. This doesn’t make it so, but corporations have become the Emperors of our world, and similar to dealing with children or the insane, we bow to what they are capable of comprehending. Business policy is too weak to handle intuitive leaps of understanding. And so, the ever adaptable human uses formulas like ROI to bend and dehumanize life into a business perspective. This twisted mindset threatens to increasingly make us work for our money (like mini corporations) instead of making our money work for us.
What Can We Assume?
Life is not going to be reduced to formulas. The return on investment is only one measure of what might be considered a “wise” decision process. The next time you hear an article or someone mention return on investment, take a careful look at what benefits and costs are not being considered in order to make sure it is not only the “appearance of certainty.” In the end, ROI is a tool. It is not a person. It is not a goal. It may not even be “truth.”
Photo Credit: Honda Fit
Don't want to miss a cleantech story? Sign up for daily news updates from CleanTechnica on email. Or follow us on Google News!
Have a tip for CleanTechnica, want to advertise, or want to suggest a guest for our CleanTech Talk podcast? Contact us here.