Case Study #1, Part B: Simple Financial Analysis of a 10 kW Grid-tied Photovoltaic System
The company indicates that they will install this 10 kW photovoltaic system for $32,000, everything included. The system should last 25 years. There is an incentive of $1000 available from the utility. You would take out a 15 year loan, at an interest rate of 5%, covering 70% of the cost of the system.
1) What is the pre-tax internal rate-of-return on the investment that you would make? How does this compare with other investments of similar risk level (e.g., low risk mutual funds)?
2) How long would you have to wait to recoup your initial investment?
3) Save this to the same .RET file you used before, but change the project name to indicate that the financial analysis has been done. Open the project database and find your .RET file: see how all the different versions of the analysis have been saved there.
Additional questions if you finish early:
4) Elsewhere in the State you read about a utility with a pilot project that pays a $0.12/kWh premium (above the retail rate of $0.10/kWh) for a period of 10 years. After 10 years, you would be paid only the retail rate. Using a Start page method 2 analysis, investigate how this would affect the pre-tax IRR and equity payback. (Hints: For now, enter $3200 as the per kW unit cost for photovoltaics on the cost analysis page. Use a discount rate a bit higher than your debt interest rate. On the Financial Analysis page, see if the “Clean Energy Production Income” can help you.)
5) You realize, however, that the retail rate has been rising at around 3% annually. Extending this into the future, how would this affect the financial feasibility of the project? (Hint: Try setting the Electricity export escalation rate cell on the Financial Analysis page).
6) Although your local government exempts solar equipment from property taxes, you find out that you would need to pay $100 per year for additional insurance. In addition, you think that it would be prudent to budget for inverter replacement, costing $3000, fifteen years into the project. These costs would be subject to 2% inflation. How does this affect the financial feasibility of the project? (Hint: Annual costs and credits can be entered in the “Annual Costs (Credits)” Section of the Cost Analysis Page. Costs that are paid less frequently than once a year are called “Periodic costs”. )
7) Considering the IRR and the equity payback, would you invest your money in this project? If not, determine what price the system would need to have in order for this to be an attractive investment for you.
8) If you still have time, investigate how income tax might affect this project.