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Calculating your Return on Investment - ROI Go back to Page 1 Go back to Page 2 |
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Remember, each incentive is applied to whatever remains after the preceeding one is applied,
like a cascading fountain.
Now we can look at the ROI |
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We are talking about a typical 5kW system that might cost $35,000 installed.
At first that sounded like a lot . . .
and then we watched the cost get
smaller and smaller and smaller!
Now, lets watch the profits grow and grow and grow!
The final cost, after the cascade of incentives, will be $5,629, but this is just the start of the ROI story. . . How you calculate your ROI depends on just how you set this up. . . 
When you sell the house, it will be more valuable [you will recoup your costs and more] - but when will that be?
Will you self-finance or will you take out a loan?
A VERY bright idea !
I don’t like the idea of added debt any more than you do. On the other hand, you are already
sending a check to the power company. Wouldn’t you rather send it to the bank, get a tax deduction
for the interest and end up owning something more than a pile of Utility bills?
I’d call that a smart investment.
1. Let’s look at the ROI with this set of assumptions:
Most folks hold onto a home for 10 years.
After 10 years you sell the house and make an additional $10,000 because of the added benefit of having
a PV
system. Remember, this is conservative, $20,000 is possible.
You can pay for the system out of pocket.
In this area, electricity goes up %1 a year, or more.
Your final PV system cost was $5,629. Over 10 years, you avoided spending $10,460 on the electricity you didn't buy. You will also accrue $10,000 more when the house is sold. This $14,831 is profit over 10 years on the initial investment of $5,629 - A total of 263% in 10 years or 26% / Year!
2. Assumption: You don't want to count your chickens etc.
Let’s ignore the recoup on sale and just count on $10,460 for the electricity you didn't need to buy. This $4,831 is profit over 10 years on the initial investment of $5,629 - This total of 86% in 10 years is 6.7% / Year
3. Assumption: You borrow the money to finance the PV system and invest your cash.
You hold onto the home for 10 years.
After 10 years you sell the house.
To pay for the PV system, you take out a loan for $5,629 at 7% and you invest the $5,629 in something or other
at 4% a year [maybe you can do a lot better than 4%!] The 7% loan will really be net 3%. Remember that the $168.87 per year you will pay in interest is currently tax deductable however, we’ll leave this depth of complexity as an exercise for a quiet nite. This net 3% loan will require $57.94 per month to cover the P&I so that, over 10 years this approach will cost $6,952.80 while you avoided $10,460 in electricity costs. Even with loan costs, you actually save about $30 a month over what you are paying now for electricity. You start to save from day #1 and it just keeps on getting better. As the cost of electricity goes up, your cost does not! Your PV system becomes more valuable over time. For the 10 years you hold the house, you will accrue $3,500 profit. And don’t forget that, when you sell, you still accrue more $10,000 using O P M [Other Peoples Money]
4. Assumption: You borrow 100% of the money to finance the PV system.
You borrow the entire finincing at 7% with nothing down.
Finincing will run $69.67 per month - $8,360 over the 10 years. In the same time, you avoid $10,460 in electricity costs. At the end of 10 years, you are ahead by $3,000 by immediately saving about $25 each and every month! Since this is cost avoidance, it is not taxable income. As before, there is the $10,000 from OPM plus a tax deduction for the financing [about $400 as year]. |
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