It discounts each year’s net solar benefit to today’s value, then finds the first year when cumulative discounted cash flow becomes non‑negative.
| Scenario | System Cost | Rebate | Y1 Savings | Discount | Years | Expected Outcome |
|---|---|---|---|---|---|---|
| Commercial rooftop | $250,000 | $15,000 | $42,000 | 10% | 25 | Discounted payback typically under 10–12 years |
| Higher cost of capital | $250,000 | $15,000 | $42,000 | 14% | 25 | Payback shifts later due to heavier discounting |
| Lower savings case | $250,000 | $15,000 | $30,000 | 10% | 25 | Payback may not be reached within the period |
- Net cash flow (year t): NCFt = Savingst − O&Mt − Insurancet + Incentivest + Residualt
- Savings growth with degradation: Savingst = Savings1·(1+g)t−1·(1−d)t−1
- Discount factor: DFt = 1 / (1+r)t
- Discounted cash flow: DCFt = NCFt · DFt
- Cumulative discounted: CumDCFt = −(Cost − Rebate) + Σ DCFt
- Enter system cost and any upfront rebate.
- Provide first‑year savings, escalation, and degradation assumptions.
- Add operating costs such as O&M and optional insurance.
- Set discount rate and the analysis period in years.
- Optionally include incentive credit timing and residual value.
- Click Calculate to see discounted payback, NPV, and the yearly table.
Discounted payback versus simple payback
Simple payback counts how quickly total net cash flow repays the initial investment. Discounted payback improves realism by reducing future benefits using a discount rate. This is useful for construction budgets where capital is scarce and timing matters. Two projects can share the same simple payback but have different discounted paybacks when incentives are delayed or costs rise.
Key drivers that move the outcome
Year‑1 savings, escalation, and degradation control the revenue side. O&M, insurance, and their escalation define recurring expense. Incentive timing is critical because a benefit received earlier has a larger present value. Residual value can improve long‑horizon cases, but it is heavily discounted at higher rates, so treat it conservatively.
Selecting a discount rate for capital decisions
Use a rate that reflects your hurdle rate or weighted cost of capital. Higher rates penalize later cash flows and can push payback beyond the analysis period. For internal comparison, keep the discount rate consistent across alternatives and vary only the technical assumptions, such as savings and O&M, to isolate performance drivers.
Reading the yearly table like a reviewer
The table shows net cash flow, discount factor, discounted cash flow, and cumulative discounted value. The discounted payback occurs when the cumulative discounted line crosses zero. Use sensitivity checks by adjusting escalation, degradation, and discount rate to see how robust the crossing point is. A strong project remains viable across reasonable ranges.
Example data for verification
Try this dataset to confirm calculations: system cost $250,000; rebate $15,000; Year‑1 savings $42,000; savings escalation 3.0%; degradation 0.6%; O&M $3,500 with 2.5% escalation; insurance $1,200 with 2.5% escalation; incentive credit 20% received in Year 1; residual $20,000 in Year 25; discount rate 10%; analysis 25 years. The cumulative discounted value should eventually become positive for this case.
1) What does discounted payback mean?
It is the time when cumulative discounted cash flow becomes non‑negative. Each year’s net benefit is reduced to present value using the discount rate before adding it to the cumulative total.
2) Why can discounted payback be longer than simple payback?
Discounting makes future savings worth less today. If most benefits occur later, the discounted cumulative total grows more slowly, so the break‑even point moves further out.
3) How should I choose a discount rate?
Use your required return, financing cost, or internal hurdle rate. For comparisons, apply one consistent rate across scenarios so differences reflect project performance, not changing financial assumptions.
4) What happens if payback is “Not reached”?
The discounted cumulative total never crosses zero within the chosen years. Increase analysis years, reduce discount rate, or revisit savings and operating costs. It may indicate the project needs redesign or incentives.
5) How do degradation and escalation interact?
Escalation increases savings over time, while degradation reduces output and savings. The calculator compounds both effects annually, so high degradation can offset escalation and delay payback.
6) Should I include residual value?
Include it only if you can justify a recoverable value at a specific year. At higher discount rates, far‑future residual value contributes less, so avoid using aggressive estimates.
7) Can I model a negative escalation rate?
Yes. A negative escalation assumption reduces future savings and can materially delay payback. Use this to test downside cases, such as falling tariffs or reduced export compensation.