Payback time to interest rate converter

Investing in a domestic solar PV system in Australia has become a positive financial investment for many households.

Unfortunately most installers, consultants and websites only supply the payback time (also called ‘payback period’ or just ‘payback’) to describe the financial situation. (Some call this even ROI, which wrong, because ROI is used in finance calculations as ‘Return on Investment’ and delivers % as result.) But for other investments like savings accounts, real estate or term deposits, a payback time is usually not given. This means that there is no direct way for comparing a solar investment to any other investment. And this is an important disadvantage for investments in solar PV.

However investment in solar technology can be seen like any other financial investment. The payback time has to be converted into a comparison rate. The simple spreadsheet below allows the conversion of the payback time into the comparison rate.

The comparison rate is term defined for home loans by the Australian Government and must be given with all domestic home loan products. However the calculation works both ways. In case of solar PV the owner is the ‘bank’ and will receive his ‘payments’ either from savings on grid demand or from an existing feed-in tariff or from a combination of both.

The comparison rate is calculated in the same way as the ‘Internal Rate of Return’ (IRR) (see Excel function) which is used in financial mathematics. In simple terms the comparison rate (IRR) describes the interest rate of a fixed rate savings account which –  with the same amount invested – returns the same final financial outcome as the investment project. (Sometimes it may be useful to use the Excel function XIRR instead of IRR.)

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Example:

As an the example on the calculator above an investment of $5000 is calculated having a payback time of 10 years. This may sound pretty poor. But according to the calculator the comparison rate (or IRR) is 8.78%.

This means that the solar investment with a payback time of 10 years (= IRR of 8.78%) is as good as $5000 invested in a savings account over 25 years with an annual interest rate of 8.78%.

(assuming interests are left in the account for 25 years) So 8.78% looks very good.: the best savings accounts available today are providing far less than half of this interest rate.

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