Quote:
Originally Posted by retiredguy123
It looks like you didn't discount the rate of return for the investment value of the initial $20,000+ cost for the system. I would have used a conservative return of about 4 percent, which would cut your rate of return about in half. I have found that most payback calculations done by contractors and even by independent organizations do not include the potential investment value of the system cost. So, $20,000 invested in a solar system today will be worth zero in 20 years. But, $20,000 invested at a rate of return of 4 percent will be worth about $44,000 in 20 years.
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Suggest you read up on IRR. An 8% IRR means that all cash flows are discounted by 8% to result in a NPV of zero. In other words, If I were to calculate the NPV using 4%, the result would have been a positive number. Or in this case, If were to place the initial investment in an 8% tax free investment and take out $1750 per year, it would last 20 years. Maybe you are saying that my 8% return is 4% better than if I invested in an instrument that yielded 4%. You are correct. You are also correct that the potential investment value in the initial investment is not included in the payback calculation. I did not mention a payback period in my post. I'm not a fan of payback period when doing financial calculations. I prefer IRR.