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You can make a positive return by investing in residential solar systems: An Arizona case study: Working paper series--09-04

Allen, David and Atwater, Chelsea Ann and Smith, Dean Howard (2009) You can make a positive return by investing in residential solar systems: An Arizona case study: Working paper series--09-04. Working Paper. NAU W.A. Franke College of Business.


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The new federal tax credit on a solar panel system makes an investment financially worthwhile. The actual 14 month production history of a 2919 watt solar system is used to calculate the net present value of the savings on APS electricity bills over the 25 year lifespan of the system. The NPV is estimated at $1,625 with an internal rate of return of 8.3%. The simple payback period is 10.6 years. The estimated savings in terms of carbon dioxide - as opposed to coal based production - is 135 tons of CO2. Sensitivity analysis shows that the projected increase in electricity rates in the future make the investment a substantial hedge against higher energy costs. Although current interest rates are extremely low, future increases in interest rates up to the IRR of 8.3% would make the investment worthwhile. Finally, since the Arizona tax credit is capped at a maximum of $1,000 the IRR changes substantially as smaller systems are analyzed. An Addendum to WPS 09-04: April 5, 2010. This is an important addendum to our March 2009 paper. In the original paper we treated the APS buyback payment as independent of the Federal tax credit and the Arizona tax credit as being subtracted from the allowable costs for the federal tax credit. Recent rulings have made both of these calculations incorrect. The federal tax credit is independent of the $1,000 state tax credit, so the 30% credit applies to the full costs of the system. This results in an improved outcome for the homeowner of $300. However, section 136 of the IRS code for Energy Conservation subsidies provided by public utilities stipulates that, pursuant to the Public Utility Regulatory Policy Act of 1978, the rebate from the public utility is considered as gross income. Using an estimated marginal tax rate of 28% (head of household, income $117k to $190k) the additional income tax is $2,446. Modifying our previous calculations, the total out of pocket expenditures by the homeowner is $8,385 instead of the $6,239. The increased income tax, however unrelated to the intent of Congress in passing the energy bill, changes the financial viability of any investment. The return of investment drops to 5.04% from 8.26%. The net present value is now a negative at -$521 as opposed to the original positive $1,625. (The assumed interest rate is 5.7%). PDF file reflects this Addendum on its cover page.

Item Type: Monograph (Working Paper)
Publisher’s Statement: Copyright, where appropriate, is held by the author.
ID number or DOI: 09-04
Keywords: Working paper, business case, case teaching method, residential solar systems, tax credits
Subjects: H Social Sciences > HG Finance
NAU Depositing Author Academic Status: Faculty/Staff
Department/Unit: The W.A. Franke College of Business
Date Deposited: 17 Oct 2015 22:32
URI: http://openknowledge.nau.edu/id/eprint/1515

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