Germany: Excel-Based IRR Commercial Project Calculations
September 25, 2014
German Fresnel collector manufacturer Industrial Solar is experiencing an increasing demand from clients all around the world: “Five years ago, we received two requests per month. Now, we receive around 50 each month and the requests are more serious,” Tobias Schwind, who is one of the Managing Directors of the company founded in 2009, confirms. Schwind has begun to notice a shift in the industry: “Whereas payback times of three to four years have, so far, been commonplace, the industry is steering towards five- to six-year periods,” he says and adds: “We, however, try to explain to our clients that they are investing in their infrastructure, and payback time is therefore not really the best criterion.” Industrial Solar offers potential clients a calculation of the Net Present Value (NPV) and the Internal Rate of Return (IRR). According to the managing director, an economic analysis based on these parameters often shows that solar process heat is worth further consideration.The net present value (NPV) is the sum of discounted cash flows, both incoming and outgoing, during a specified period. Obviously, the NPV strongly depends on the assumed discount rate. The internal rate of return on an investment is the “annualised effective rate of return which makes the net present value of all cash flows (both positive and negative) from a particular investment equal zero. It can also be defined as the discount rate at which the present value of all future cash flow is equal to the initial investment or, in other words, the rate at which an investment breaks even”, as Wikipedia explains it.
Industrial Solar employs an Excel-based tool for analysing a project’s economic parameters. The user must first enter the planned installation’s basic data, such as generator size, investment costs, backup energy fuel and specific price, as well as the loan share in investment costs. The NVP and the IRR are then calculated by using the relevant Excel formulas. The results in table 2 and 3 are based on the following project outline (table 1):
|
Project data |
|
Further assumptions |
|
|
Collector field size |
1,760 m² |
System efficiency degradation per year |
0.25 % |
|
Investment (minus incentive) |
720,000 EUR |
Boiler efficiency |
85 % |
|
Backup |
Diesel |
Annual O&M cost share in total turnkey investment |
2 % |
|
Fossil fuel price |
60 EUR/MWh |
Escalation of O&M costs |
2 % |
|
Equity share |
100 % |
Lifetime of system |
20 years |
Table 1: Assumptions for calculation examples in table 2 and table 3
Source: Industrial Solar
Two of the variables have a significant influence on the resulting NVP and IRR: The price increase index for the fossil fuel backup system and the installation site’s irradiation. The following table shows the NVP and the IRR in relation to these two values.
|
Irradiation (DNI) |
1,500 kWh/m²a |
1,000 kWh/m²a |
1,500 |
2,000 kWh/m²a |
||
|
Annual increase in fossil fuel prices |
5 % |
7.5 % |
10 % |
7.5 % |
||
|
NPV (in EUR) |
1,080,712 |
1,809,771 |
2,820,806 |
849,887 |
1,809,771 |
2,769,656 |
|
IRR |
9 % |
12 % |
15 % |
7 % |
12 % |
16 % |
Table 2: Selected results from IRR Excel tool calculation
Source: Industrial Solar
Table 2 shows that the EUR 720,000 investment financed by 100 % equity requires at least an irradiation of 1,500 kWh/m2a and an annual fossil fuel price increase of 7.5 % to achieve a double-digit IRR. The following table shows the changes in NPV and IRR when one decreases the equity share from 100 to 50 % under the aforementioned conditions. As expected, the IRR increases because the rate of return only refers to the equity part of the investment.
|
Equity share in total investment costs (10 % loan costs) |
100 % |
75 % |
50 % |
|
NPV (in EUR) |
1,809,771 |
1,717,590 |
1,618,865 |
|
Internal Rate of Return |
9 % |
12 % |
13 % |
Table 3: Excel tool calculations for project described above (irradiation = 1,500 kWh/m2a; fossil fuel price index of 7.5 %)
Source: Industrial Solar
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