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Should you install solar panels on your home? The cost of the panels is $20,000 today...

Should you install solar panels on your home? The cost of the panels is $20,000 today and will save $1,500 per year on average for 25 years. In addition, assume you are eligible for a 30% tax credit on installation cost (assume received in one year). What is the NPV, IRR and payback of the solar panels for 25 years (useful life). Hint: Treat the savings as a cash inflow.

Cost Today (T=0) $20,000 No loan
Annual Savings (T=1-25) $1,500
Tax Credit % (T=1) 30% credit tax savings= 30% x Installation Cost
NPV Discount Rate 5%
NPV ?
IRR ?
Payback ?
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Answer #1

NPV :

year cash flow pv
0 -20000 -20000
1 7500 7142.857 DISCOUNT RATE 5%
2 1500 1360.544
3 1500 1295.756
4 1500 1234.054
5 1500 1175.289
6 1500 1119.323
7 1500 1066.022
8 1500 1015.259
9 1500 966.9134
10 1500 920.8699
11 1500 877.0189
12 1500 835.2561
13 1500 795.482
14 1500 757.6019
15 1500 721.5256
16 1500 687.1673
17 1500 654.445
18 1500 623.281
19 1500 593.6009
20 1500 565.3342
21 1500 538.4135
22 1500 512.7748
23 1500 488.357
24 1500 465.1019
25 1500 442.9542
NPV 6855.203

IRR :

year cash flow pv
0 -20000 -20000
1 7500 6868.132 DISCOUNT RATE 9.2%
2 1500 1257.9
3 1500 1151.923
4 1500 1054.874
5 1500 966.0021
6 1500 884.6173
7 1500 810.0891
8 1500 741.8398
9 1500 679.3405
10 1500 622.1067
11 1500 569.6948
12 1500 521.6985
13 1500 477.7459
14 1500 437.4962
15 1500 400.6376
16 1500 366.8842
17 1500 335.9746
18 1500 307.669
19 1500 281.7482
20 1500 258.0112
21 1500 236.274
22 1500 216.3681
23 1500 198.1393
24 1500 181.4462
25 1500 166.1595
NPV -7.22871

IRR = where NPV of project becomes equal to zeor = 9.2%

payback period = initial investment / annual cash flow = ($20,000 - $7,500) / $1,500 +1 = 9.33 = 10 years

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