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How to calculate payback on your commercial solar investment

calculate payback on your commercial solar investmentPayback is one of the most important considerations for any commercial solar installation, focusing on how much money a given setup will produce over time. There are four major categories of calculation, each of which takes different things into consideration.

Basic Payback

This category is the broadest and least accurate way of measuring the success of a system, but it does work for creating a loose estimate of whether or not the system is practical in a given location. The calculation used most frequently is “Cost / Savings = Years to Pay Back”. The average commercial solar system will last between 25 and 30 years, and naturally, faster payback means greater income over time. In most cases, more sunlight means faster payback (in terms of reduced bills and/or increased sales into the grid), while less sunlight will slow things down and lower the final return.

Return on Investment

This projection focuses on the estimated savings and costs over time – including many from sources that basic payback will not take into consideration. Major considerations include:

  • Applicable taxes, interest fees, and other loan costs for installing the system
  • Estimated incentives, rebates, and performance-based bonuses over the lifetime of the system
  • Estimated increase in utility costs over the lifetime of the system
  • Current energy usage and bills
  • Estimated production of solar power over the lifetime of the system

Though still not perfectly accurate – as most of the numbers input are professional estimates, not absolute guarantees – the Return on Investment evaluation can provide a much more accurate idea of when the system will be fully paid off and how much profit the array will produce over its lifetime. Even a small return on investment can make the project worth it, since the primary savings come from reduced bill payments that don’t affect other investment opportunities.

Net Present Value

This is one of the least-performed estimating techniques, since it takes other elements into consideration – such as the rate of inflation and what else could have been done with the money spent on going solar. Historically, solar systems have shown a large, positive value over time, making them a fundamentally sound investment – the main goal of this estimate is to determine how good the investment truly is in any given scenario.

As the name suggests, the NPV examination focuses on the present value of the system, balancing the costs and total benefits over time.

Internal Rate of Return

This is the last of the four examinations that you can obtain. The ultimate goal is to determine your return throughout the lifetime of the system – many businesses use this technique when comparing investment opportunities and will typically choose whichever project offers the greatest return on their money. IRR rates are based on the results of an NPV examination, and will take into account elements like the type of loan used to finance the project, the interest rate on debt, upfront rebates, and similar elements.

One Last Thing…

The benefits of commercial solar installations depend mainly on the facility in question, and no online guide can tell you whether or not you’d get a favorable return by installing solar panels onto your building(s). For that, you can – and should – get a professional evaluation. When we perform an evaluation, we’ll take into account every variable we can think of in order to produce the most accurate estimate for your building, no matter how large or how small it may be. We firmly believe that commercial solar installations are a great investment, but don’t just take our word for it – we’ll gladly run the numbers for you and prove it.