Your business receives a proposal to install a solar energy system on the roof.

Question

Your business receives a proposal to install a solar energy system on the roof. The system is estimated to be able to supply 450 kW-hr of power each month. Electricity currently costs you $0.10 per kW-hr. The system will be installed and the entire cost will be financed at 4% APY for 5 years. Assuming your business has an IRR of 10% per year, what total price would you be willing to pay to make this investment "breakeven" over a 10 year operating period? In other words, what initial system price has a PW equal to the PW of the monthly cost savings?

Explanation / Answer

PW of monthly savings P×[1-(1÷(1+r)^n)]÷r Here, 1 Interest rate per annum 10.00% 2 Number of years                                                                      5 3 Number of compoundings per per annum                                                                   12 4 = 1÷3 Interest rate per period ( r) 0.83% 5 = 2×3 Number of periods (n) 60 Savings per month (P) $                                                         45.00 PW of monthly savings $                                                   2,117.94 45*[1-(1/(1+0.83%)^60)]/0.83%

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