Calculator
Solar NPV and IRR Calculator — Discounted Cash Flow
Simple payback tells you when the money comes back. It says nothing about whether the investment beat the alternative uses of that money. Net present value and internal rate of return do.
This calculator builds the full cash-flow series — savings rising with tariffs, production falling with degradation, operating costs and a mid-life inverter — and returns the standard investment metrics.
Enter the investment
Avoided imports plus export income.
Net present value
€10,019
Beats the discount rate
Internal rate of return
13.5%
Simple payback
8 years
Discounted payback
10 years
Profitability index
2.11
NPV per euro invested, plus one
Total undiscounted profit
€26,574
How the calculation works
Each year the system produces a benefit equal to the avoided import cost plus export income. That benefit rises with the tariff escalation you assume and falls with module degradation, and the two effects partly cancel — at 2.5% escalation and 0.5% degradation, the net cash flow still grows about 2% a year.
Net present value discounts every year's net cash flow back to today and subtracts the capital cost. A positive NPV means the investment earns more than the discount rate you set. Internal rate of return is the discount rate at which NPV would be exactly zero, found here by bisection.
Discounted payback is the year cumulative discounted cash flow turns positive. It is always later than simple payback, and it is the more honest figure to quote.
The formula
CF_y = S₁ × (1+e)^(y−1) × (1−d)^(y−1) − O − R_y NPV = −C₀ + Σ CF_y / (1+r)^y IRR : r such that NPV(r) = 0 PI = 1 + NPV / C₀ S₁ year-one benefit · e escalation · d degradation O opex · R_y replacement · r discount rate
Assumptions behind the numbers
- All values are nominal, so the discount rate should also be nominal (real rate plus expected inflation).
- The year-one benefit is entered by you and should come from a self-consumption analysis, not from total generation multiplied by the retail tariff.
- Escalation applies to the whole benefit, treating import and export prices as moving together. If your export price is fixed by contract, model it separately.
- Tax is not modelled. Commercial projects need depreciation and tax effects added.
- No resale or residual value is credited at the end of the analysis period, which is conservative for a system with 10 to 15 years of life remaining.
How to read the result
A residential system in a high-tariff European market typically returns 8 to 14% IRR with a positive NPV at a 5% discount rate. Below 5% IRR the investment competes poorly with low-risk alternatives unless the owner values energy independence separately.
Test the sensitivity: change the escalation assumption by one percentage point and see how far NPV moves. If the case only works at 5% escalation, it is not a solar case, it is a bet on energy prices.
Profitability index above about 1.5 indicates a strong project. It is more useful than NPV when comparing systems of different sizes.
Worked example
A €9,000 system saves €1,250 in year one, with 2.5% price escalation, 0.5% degradation, €120 a year of running costs, a €1,400 inverter in year 13, assessed over 25 years at a 5% nominal discount rate.
Cash flow starts at €1,130 net and grows to roughly €1,690 by year 25 as escalation outpaces degradation. Discounted, the stream is worth about €17,600 against a €9,000 outlay and an €745 discounted inverter, giving an NPV near €7,900.
IRR comes out around 12.5%, simple payback in year 8 and discounted payback in year 10. The gap between those two payback figures is exactly the cost of capital the simple figure ignores.
Mistakes that skew the answer
- Using total generation × retail tariff as the year-one benefit, which typically overstates it by 30 to 50% because most of the export is paid far less.
- Mixing a real discount rate with nominal escalating cash flows, which double-counts inflation.
- Assuming energy prices escalate at historical peak rates rather than a defensible long-run figure.
- Ignoring the inverter replacement, which moves IRR by roughly one percentage point on a residential system.
- Reading IRR alone on a small project. A 20% IRR on €3,000 creates less wealth than 11% on €12,000.
Questions readers ask
- Is NPV or IRR the better measure?
- NPV, because it measures the value created in euros and does not mislead when comparing projects of different sizes or lifetimes. IRR is useful as a communication device and for comparison against a hurdle rate, but it can be ambiguous when cash flows change sign more than once — for example when a large battery replacement is included.
- What discount rate should I use?
- For a household paying cash, the nominal return you would otherwise earn on the money — typically 3 to 6%. For a business, the weighted average cost of capital. For a financed system, model the loan directly and discount the equity cash flows at your own required return.
- Should I include the value of energy independence?
- Not in the financial model, because it cannot be measured objectively. Note it separately as a qualitative benefit alongside the numbers, along with resilience if you have backup capability.
- Why is discounted payback so much later than simple payback?
- Because early savings are worth close to their face value but late ones are heavily discounted. On a 25-year project at 5%, a euro in year 20 is worth 38 cents today. That gap is the honest cost of tying up capital.
- How sensitive is the result to the tariff assumption?
- Very. On a typical residential case, a one percentage point change in escalation moves NPV by roughly 10 to 15%. Always present a range rather than a single figure, and state the escalation you used.