That's incorrect. Payback = cost/savings pa. Strictly. (It corresponds to a Net Present Value calculation with discount rate = 0%). See below.I'm talking about solar panel installation for my house. If I invest in the solar panel installation, the quote I get is around ~20k for the whole installation w/o battery backup, after federal tax deduction (30%) . I pay about 1.5k per year on electricity, and this might increase in the future. The payback period is defined as "The number of years to recover your solar energy investment", which is when the electricity generated reaches about half of the solar panel cost. In this case it's 10k, and the payback period is about 10 years.
What you are doing is not correct:Assuming 7% annualized return on stock market, 20k will become 40k after 10 years.
With the solar system, after the payback period, not considering deprecation, I'll be getting ~1k savings per year. So after 10 years, I'll have the 20k in the solar panel itself + 10k total in saving = 30k. I'm not sure how much the solar panel will increase my house's value when it gets sold, but maybe there's a small bump? Not sure.
Anyways, did I miss anything in my calculation? 40k vs 30k doesn't seem that bad for solar panel as an investment, especially if the house value increases by more than the solar panels' cost. What do you think?
- solar panels will depreciate over time. Below I assume a 25 year life (and linear depreciation ie same amount each year). I think that's reasonable. What will actually happen is performance of solar panels will increase over time, and eventually someone will replace the panels with higher performing ones HOWEVER even if you don't do that, you still get the benefit of having the ones you do have. Their performance degrades over time, but only gently. (Your used panels will someday make someone in a poor country in Latin America or Africa very happy).
When you sell your house is a tricky one-- you have to make an assumption. By using 25 years as below I have assumed that problem away -- you get 25 years of benefits and then the panels are worthless. My assumption implies a buyer for your house in say 15 years would pay the value of the solar panels (in terms of energy saved) for another 10 years (until the panels are assumed to have no value).
Notwithstanding the calculations below, I think a greater than 10 year payback makes the system a marginal investment. I would definitely not do this if I thought I was going to move in the next 5 years. You should be able to gather information about the impact on the resale value of your home, over time, to better inform that estimated value.
1.
Simple payback in years = Cost of system (all in)/ savings
Since there's no tax on the savings, that is a pretty simple calculation. And it's for full payback, not half - you will never find a textbook or analysis that does it for "half cost".
2. proper finance approach
Net Present Value = -Cost + sum of future benefits, discounted by the formula /(1+r)^y where y= years, r = annual discount rate
Cash flows should be easy - you might assume they grow with inflation (say *(1+3.0%) for each successive year)
I would use a 25 year panel life, but you do have to factor in inverter replacement around year 12, usually. After 25 years the panels are worthless (that's not true, they would still generate electricity, but it's a reasonable assumption for these purposes
Note Excel gives you an =NPV formula if you don't like doing the discounting yourself
You do have to figure out a discount rate. I would suggest something like 5% ie 3% inflation + 2% real cost of capital. Because the savings should be fairly risk free. 7% however would be perfectly reasonable: 3% inflation + 4% real discount rate.
If you don't want to worry about inflation do the whole calculation with real cash flows (ie today's money). So you don't inflate the annual cost savings (assume they show no real growth) and use say 4-5% as your discount rate.
In any case the investment will be value enhancing if NPV > 0
Internal Rate of Return =XIRR(values, dates)
So you can work out the cash flows for each year (remembering the cost of the system is a big negative)
That's one row and the first value in that is usually the cash outflow for the investment (formula won't work without at least one negative value)
Then dates - it's probably easiest to forget monthly and just assume everything is 31/12/21xx
(In which case you could use the =IRR(values) formula
Again I would do this for 25 years.
IRR is just the discount rate that sets the present value of the costs = present value of the benefits.
You can then compare that IRR to other investments you might make. But don't forget to factor in tax. Your returns for other investments may be after tax. 7-8% pa is reasonable for stock investments (assuming 3% inflation) but that would generally be before tax.
Re Finance. Do not lease finance the system. Too many issues arise eg encumbrance on the property, securitization of the loan etc. The only clean way would be to borrow money on a home equity loan (HELOC essentially). In which case I would want an IRR > interest rate on the home loan.
An important consideration is liquidity. You can sell a stock portfolio if you need money. Once you have invested in the solar array, there's no easy way to get that money back.
Statistics: Posted by Valuethinker — Wed Jun 19, 2024 3:40 am — Replies 8 — Views 546
