Calculating ROI

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water-works

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Oct 31, 2011
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Hi guys,

I'm new here but looking for some help with my math skills. I am very stuck on this problem.

I'm trying to calculate the ROI for a customer.

Problem:
I just sold a new solar system to a client, who wants to know what his ROI will be on the system.

His current monthly payment to the utility company is $205. He took out a loan to pay for the new solar system at $350/month for 10 years (the system will cover 100% of his usage). What is his ROI?

Assume that there is an 6.7% increase annually for his utility rates.

How do I calculate this?

Thanks for any help here.
 
JeffM said:
It is nerve racking to disagree with tkhunny, but I do not believe that anything to do with the loan is relevant to the rate of return on the solar system.

If I buy a stock that appreciates by 10% in one year, the rate of return on that investment remains 10% whether I paid cash or borrowed at 6% or 11%. Of course if paid 11% to make an investment returning 10%, that was a losing deal, but the stock still returned 10% regardless of how I financed it.
Click to expand...

"MIGHT" - ROI is a tricky business. It depends on how management wants to calculate it.

No disagreement at all. :)
 
Thanks for the reply everyone. tkhunny, you are so right on the 'management' comment. LOL.

Here are the additional details I have.

His cost is $35,260.50 for the solar system.

But then his tax credit is $10,895. Sorry but I didn't think about this until right now! Oiy this is challenging.

25years is the length of warranty on the system.
 
Hi Denis.

He borrowed the amount owed, but stated $350 payments to bank for 10 years. So that comes out to $42k loan in reality.
 
Denis said:
Huh? $42k is simply the total of his repayments: 120 * 350 = 42,000.
So he borrowed $35,260: means an interest rate of 3.58% annual cpd. monthly.
Whadda heck does he intend to do with the $10,895: go on a drunk? :shock:
Click to expand...

Thanks Denis.

So then assuming he uses the $10,895 tax credit to pay back the loan (rather than going on a binder, haha),

His total initial investment costs is: $42,000 - $10,895 = $31,105 ? (is this correct?)

Then I need to calculate his payments over the life of the system (25 years) that he would have made if he didn't have the solar system, and compare the two for ROI?

I can't figure out the formula for this, since it adds 6.7% (increase annually) to payments, starting at $205 to utility company. Is this correct?
 
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