IRR and NPV for Solar Cashflows

IRR and NPV turn a long stream of solar cashflows into decision metrics. They answer different questions.

NPV: value in today's money

Net present value discounts future cashflows to today's value using a chosen discount rate. If NPV is positive, the model says the project creates value above that required return. A higher discount rate makes future solar savings less valuable, so NPV falls as the discount rate rises.

IRR: implied annual return

Internal rate of return is the discount rate that makes NPV close to zero. It is useful because many investors think in annual return terms. However, IRR can be misleading when cashflows change sign more than once or when projects are very different in size.

Why both matter

Project A can have a high IRR but small absolute profit because it is small. Project B can have a lower IRR but much larger NPV because it deploys more capital at an acceptable return. Solar buyers should look at both return rate and total value.

Inputs that move IRR and NPV

• Initial EPC cost.
• Self-consumption ratio and retail electricity price.
• Export tariff or net metering credit.
• Annual degradation and equipment availability.
• Debt ratio, interest rate, and repayment term.
• Tax and incentive treatment.

Use IRR to compare return efficiency. Use NPV to estimate value creation under your required return.