Therefore: Net Solar System Cost/Annual Utility Savings from Solar = Simple Payback in Years. 2,00,000 into your initial installation, you earn Rs. In fact, the payback period is one of the easiest parameters to comprehend and very often consumers rely on it for quote comparison. A positive value for NPV indicates that the project is set to make money or prove profitable to clients over the time period considered. Payback Period Formula. The payback period is expected to be 4 years ($400,000 divided by $100,000 per year). In fact presently, higher prices are recorded for property with solar installation! Although calculating the payback period is useful in financial and capital budgeting, this metric has applications in other industries.It can be used by homeowners and businesses to calculate … So, in both cases, we should go ahead with the transaction. Payback Period is the time taken for a project to pay for itself i.e. For example, if the IRR of a project is 12%, it means that your solar energy investment is projected to generate a 12% annual return through the life of the solar system. The payback period formula is used for quick calculations and is generally not considered an end-all for evaluating whether to invest in a particular situation. Payback period can be calculated by dividing the total investment cost by the annual net cash flow. The payback period is the time it takes for a project to recover its investment expenditures. NPV is how much return the solar plant will make, accounting for the time value of money. With regards to installing a solar panel system, the IRR is a criterion that indicates the returns that your installation is expected to generate for you as an investor and serves as a benchmark for future projects. The greater your yearly savings are, the shorter your payback period will be! If you choose to take a loan, data will include details such as: A glance at the IRR on a project is a good indicator of the prospects of a project and should be done before considering an installation. Your solar plant is an asset that makes you money. Most commercial installers take into account the net cost of the solar system after incentives have been applied and divide it by your projected annual electric bill savings. In capital budgeting, the payback period is the selection criteria, or deciding factor, that most businesses rely on to choose among potential capital projects. It may take years or even decades to recover the initial cost. The payback period is 3.4 years ($20,000 + $60,000 + $80,000 = $160,000 in the first three years + $40,000 of the $100,000 occurring in Year 4). Using Payback Period Formula, We get-Payback period = Initial Investment or Original Cost of the Asset / Cash Inflows; Payback Period = 1 million /2.5 lakh; Payback Period = 4 years; Explanation.