Looking to generate some additional income from the restaurant building you own,

Question

Looking to generate some additional income from the restaurant building you own, you explore the idea of installing maintenance-free solar panels on the rooftop. The utility company agrees to pay you $6,200 per year forever (with each payment received at the end of the year) for the power produced on your rooftop. There are no on-going costs to the solar panels.

If you find a company who will install the solar panels (material and labor) for $54,000, what will the Internal Rate of Return on this project be? Show your work.

Explanation / Answer

Present value of perpetual annual income = Annual income / Interest rate (r) = $6,200 / r

For 'r' to be IRR, Present value of this perpetuity must equal present value of the cost:

$6,200 / r = $54,000

r (IRR) = $6,200 / $54,000

= 0.1148

= 11.48%

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