Financial Calculation - Help

[TwoHeadsTas]

OK you Excel and other wizzes out there.  It's 40 years since I did the mathematics of finance as part of my accounting degree, and I'm stumped on how to do a calculation I need.

Basically, I have several quotes for financial returns / cost savings for solar systems for the motor museum I'm a director of.  Of course, none of the calculations from the different submitting companies use the same base, so I'm trying to bring them back to a common base for comparison purposes.

One calculation uses a 25 year period with a 3% increase pa in cost to arrive at a total Power Bill saving of $173,669.  

Can anyone help me work out what the cost in the first year would be (i.e. payment 1)???  Or point me to which Excel function will work this out??

Thanks

 

[jakroo]

The 174k represents savings over 25 years assuming 3% compound growth of cost.  Is this the cost of electricity? If so, what's the annual cost today? Or does it also include the cost of the system? If so, then what is that cos I think you'll need to exclude that from the cost to get to a proper savings value.

I expect they're saying that the ongoing cost is zero (ie any income and expenses will net out) if you install the solar. Is this the assumption?

I'm thinking you need to use the compound interest/growth function but use it to solve it for principal rather than interest.  Algebra will do this for you unless MS Excel has a specific function.  NPV maybe....

Then you may need to use algebra to bring them all back to the 4 components of  cost+growth+NPV+future value of savings etc

[TwoHeadsTas]

23 minutes ago, jakroo said:

The 174k represents savings over 25 years assuming 3% compound growth of cost.  Is this the cost of electricity? If so, what's the annual cost today? Or does it also include the cost of the system? If so, then what is that cos I think you'll need to exclude that from the cost to get to a proper savings value.

I expect they're saying that the ongoing cost is zero (ie any income and expenses will net out) if you install the solar. Is this the assumption?

I'm thinking you need to use the compound interest/growth function but use it to solve it for principal rather than interest.  Algebra will do this for you unless MS Excel has a specific function.  NPV maybe....

Then you may need to use algebra to bring them all back to the 4 components of  cost+growth+NPV+future value of savings etc

Yes, this is the cost of the electricity saving over the 25 years, at 3% compound.  What I'm trying to work back to is what would be the cost / saving in year 1, as this figure isn't quoted anywhere.  All the calculations I've come up with assume a constant $ amount each year, rather than an increasing yearly amount

[smit2100]

1 hour ago, jakroo said:

The 174k represents savings over 25 years assuming 3% compound growth of cost.  Is this the cost of electricity? If so, what's the annual cost today? Or does it also include the cost of the system? If so, then what is that cos I think you'll need to exclude that from the cost to get to a proper savings value.

I expect they're saying that the ongoing cost is zero (ie any income and expenses will net out) if you install the solar. Is this the assumption?

I'm thinking you need to use the compound interest/growth function but use it to solve it for principal rather than interest.  Algebra will do this for you unless MS Excel has a specific function.  NPV maybe....

Then you may need to use algebra to bring them all back to the 4 components of  cost+growth+NPV+future value of savings etc

Can't  you keep it simple and use a Discounted cash flow over 15 years for all scenarios . Reckon those panels will last 25 YEARS.  I would put that to the bottom of the pile on face value on the BS meter

Base case is what your current electricity bills are for next 15 years  annual bills and just   use 5% inflation and discount rate of 5%. And in some inspections  allow for an event every 5 years.  Work out Npv

Then cash flow out current quotes and normalize over  15 years.  use the same discount rate of 5% any rebates put in as negative cost any maintenance/ inspections etc is a cost.

Which scenario comes out with the best Npv

 

 

 

 

[jakroo]

 

1 hour ago, TwoHeadsTas said:

Yes, this is the cost of the electricity saving over the 25 years, at 3% compound.  What I'm trying to work back to is what would be the cost / saving in year 1, as this figure isn't quoted anywhere.  All the calculations I've come up with assume a constant $ amount each year, rather than an increasing yearly amount

but may be you do know starting point.  Assuming that your bill goes from whatever it currently is down to zero, the the starting point is your current power bill.

 

This page will show you the calcs better than I can explain - read the whole thing and you'll get the gist.  I'd start with a first year value of 3k and see if it'll get you close to the 174k after 25 years.  But like you have said it is complex unless you use a static bill value which is exactly opposite to what the assumption is.

Or use the savings calculators 🙂 25 years = 300 months.  Target is 174k at the end of 25 years.  So 12 x 390 is 4700.  Is this what your current annual power bill is?  That is, if you had done it last year, then instead of this year being 4700, the bill is 0.....next year the bill be zero instead of 4800.....year after that it'll be zero instead of 5k (rounded up each time)

[DS911]

If I am reading this correctly, you are saving a total of $173,669 in 25 years.  Each year the cost increases 3%, so you are saving more each year.

A simple calc you can do in Excel to determine the savings per year could be as per the attached.

I get a year 1 savings of $4,763.37.

Does this work?

SolarCalc.xlsx

[ArthurK]

Unfortunately its not as simple. You need to know all the assumptions they have used in producing the projected savings. They talk about the 3% increase in cost per annum yet they dont talk about the potential reduction in Solar Feed In Tariff. In order to fully understand you need to compare all elements of current cost of electricity vs future cost, current Feed in Tariff vs future (which will be lower if not 0 at some point), self consumption (the biggest savings) vs returned to the grid and to top it off its projected solar production with a diminishing production over the lifetime of 25 years. 

I can tell you now you should be looking at this over a shorter period of time and 25 years is pie in the sky projection for this asset as way too many variables out of your control to factor in. From the time we installed our system, electricity costs and feed in tariffs have fluctuated in both directions. We have seen a FIT as high as 12c and as low as 10c, electricity as high as 32c and as low as 24c and not necessarily the higher costs now either ie electricity gone down in cost not up.

Without knowing what size the system you are looking at and the cost of the system its a hard calculation to verify without some serious assumptions. 

[KGB]

I use one of these, frequently.

 

 

[Nikos]

I'll have a crack,....$4,763.37 in Year 1, and $9,682.95 in Year 25.

Not saying it's right (could be), but I think it would be very close.

 

Seems to be two posts on this.

[edgy]

Also, don't forget to reflect the cost of capital... assuming you will either expense it in P&L via a set a life cycle of the asset, or perhaps an instant write off if eligible. 

[TwoHeadsTas]

52 minutes ago, edgy said:

Also, don't forget to reflect the cost of capital... assuming you will either expense it in P&L via a set a life cycle of the asset, or perhaps an instant write off if eligible. 

ACNC registered charity, so no tax implications 🙂  Cost of capital for is really F@#k all for us - being we get on the term deposit 😞 

 

56 minutes ago, Nikos said:

I'll have a crack,....$4,763.37 in Year 1, and $9,682.95 in Year 25.

Not saying it's right (could be), but I think it would be very close.

 

Seems to be two posts on this.

This amounts are in the ball park of what I would probably expect

 

Thanks everyone for your input and advice 🙂  PFA comes through again.....

 

[WB997.2GTS]

A little off topic, but when considering a solar system you should look into the quality of the components and its location. If you are only saving $2>4k per year and the cheap inverter fails, the roof is rusty and the equipment needs to be removed for repairs there goes your savings. Do you buy a string inverter or individual micro inverters. Do you buy cheap panels or more expensive high wattage panels.  Does your load vary and the majority of it is early evening when the sun has gone down, you do not have a battery and you are buying energy at a high rate. 

[TwoHeadsTas]

Aware of all of these things mate, we have chosen our 3 most reputable local installers with extensive commercial experience to get our quotes from.  2 of them are using the same inverter, one is using the 133% of inverter capacity for panels available to us, with the choice of 3 different level panels.  Basically brand new building, so we're starting from a good base 🙂

 

[PCM911T]

Ok, up front let me say that I find any "savings on electricity schemes" a bit of a joke. In the greater scheme of things our electricity costs pale into insignificance if you compare them  to other costs, for example food! In my opinion you will be running at a loss on the installation for years, because of the capital outlay and opportunity costs of using the money in a more productive way - like buying more cars to exhibit or building extensions to the museum.  These savings are really an upfront payment on electricity the cost of which may reduce, but don't hold your breath.  And you are in Tasmania which has excess hydro power.

 In short - what is the upfront cost and how long will it take to get that back.

 

Paul M

Aged 72!

[DJM]

There is a feel good factor aside from the financial.  I put in 8kW and a battery, unlikely I’ll pay it back for a long while (maybe 10y) but it’s cool watching the electrons flying around and bills much smaller , that’s gotta be worth something 😂

 

[TwoHeadsTas]

Yeah, we've had a  6.5kw panels / 5kw inverter system at home since we we built our new place 8 years ago.  Well and truly paid for itself, particularly when we had 1:1 FIT for 6 1/2 years of that.  Will have a harder time justifying a battery install at the moment though, although we are thinking about it.....

[ArthurK]

40 minutes ago, TwoHeadsTas said:

Yeah, we've had a  6.5kw panels / 5kw inverter system at home since we we built our new place 8 years ago.  Well and truly paid for itself, particularly when we had 1:1 FIT for 6 1/2 years of that.  Will have a harder time justifying a battery install at the moment though, although we are thinking about it.....

For the cost of a battery add to your system its far more productive and financially rewarding. We put in 21kw of panels would have gone full 30kw if we had the roof space.

 

44 months since installation, aside from self consumption and offsets all we pay in electricity now is $300 a year vs 2014 which was close to $12000.

[jakroo]

23 minutes ago, ArthurK said:

 

 we pay in electricity now is $300 a year vs 2014 which was close to $12000.

At 12k pa in electricity I'm thinking you alone have caused global climate change. In my small business which runs hot things to cook with and a few fridges and freezers to keep stuff cold, my power is about 10k pa.  In contrast, my home is about 1k pa.

 

[smit2100]

10 minutes ago, ArthurK said:

For the cost of a battery add to your system its far more productive and financially rewarding. We put in 21kw of panels would have gone full 30kw if we had the roof space.

 

46 months since installation, aside from self consumption and offsets all we pay in electricity now is $300 a year vs 2014 which was close to $12000.

You forget to disclose how much you have outlayed in capital.  The other way of looking at it on the back of an envelope  for twohead tas based on you example  is pay back period  So in  2014 you were paying a grand a month in electricity bills.  So over 46 months your telling me  46000.      Whats you total capital outlay.

As an simple payback period in years for your  example   its   total capital outlay / ( 12000 -300 plus any offset credits) 

Can't twoheads  do that calculation for the 3 bidders ( put their cost in ) and put his annual electricy costs less any incremental cost  any offset credits  that fits on an envelope for each bidder  and less than 5 minutes of calcs.   then  whose got the smaller payback period vs quality equipment ( eg 25 years is BS) and consider useful life of  components relative to the payback period.  The bigger the gap between payback period and the need to replace bits in years  wins.  Eg the free ride period.   But I would then do a 15 year NPv  to confirm the back of the envelope selection based on payback period.  30 minute of calcs tops on a spreadsheet.

[ArthurK]

15 minutes ago, jakroo said:

At 12k pa in electricity I'm thinking you alone have caused global climate change. In my small business which runs hot things to cook with and a few fridges and freezers to keep stuff cold, my power is about 10k pa.  In contrast, my home is about 1k pa.

 

Biggest issue we had was/is the 24x7 running of the dehumidifier in the indoor pool. Similarly with 50w downlights (close to 200 throughout the house) and other power hungry devices it didnt make for great usage costs. That and a very bad electricity plan at the time it just wasn't pleasant. 

When we returned from our stint in Singapore made sure I did our homework on everything electricity. Changed to LED, solar, introduced a better plan and dropped to a more palatable cost.

6 minutes ago, smit2100 said:

You forget to disclose how much you have outlayed in capital.  The other way of looking at it on the back of an envelope  for twohead tas based on you example  is pay back period  So in  2014 you were paying a grand a month in electricity bills.  So over 46 months your telling me  46000.      Whats you total capital outlay.

As an simple payback period in years for your  example   its   total capital outlay / ( 12000 -300 plus any offset credits) 

Can't twoheads  do that calculation for the 3 bidders ( put their cost in ) and put his annual electricy costs less any incremental cost  any offset credits  that fits on an envelope for each bidder  and less than 5 minutes of calcs.   then  whose got the smaller payback period vs quality equipment ( eg 25 years is BS) and consider useful life of  components relative to the payback period.  The bigger the gap between payback period and the need to replace bits in years  wins.  Eg the free ride period.   But I would then do a 15 year NPv  to confirm the back of the envelope selection based on payback period.  30 minute of calcs tops on a spreadsheet.

No secrete here 31K. We are expecting roughly a 5-6 year payback. See my previous response 12K (2014) in 2017 dropped with some further changes to the house and electricity plan. AGL was ripping us a new one and I never did anything about it.