Solar NPV, IRR and Payback: Worked Examples

Three numbers decide whether a solar project gets approved: how fast it pays back, how much value it creates, and what yearly return it earns. Each one suits a different reader, and showing the wrong one can lose the sale.

Last updated: November 2026

This guide shows how to work out all three. It runs one 10 kW home and one 500 kW business system through every step, so you can see the same numbers move from payback to NPV to IRR.

The three metrics in one table

The discount rate is the yearly return you could earn on your money elsewhere. A discount rate turns a future dollar into a smaller dollar today.

Example inputs

Check: home 14,000 x $0.15 = $2,100, minus $100 = $2,000. Business 700,000 x $0.12 = $84,000, minus $6,000 = $78,000.

To keep the example simple, every kWh gets one value. A real project splits power you use from power you export, each at its own price. Upkeep stays flat. Net savings in year t are production x price, with 0.5% less output and 3% a higher price each year, minus upkeep.

Simple payback

Payback shows how fast the money comes back.

Simple payback = net system cost / year 1 net savings

• Home: $20,000 / $2,000 = 10 years
• Business: $500,000 / $78,000 = 6.4 years

This version assumes flat savings. If power prices rise 3% a year and output falls 0.5% a year, savings grow. Adding up the real yearly savings, payback is about 9 years for the home and about 6 years for the business.

Simple payback has limits:

• It ignores the time value of money. A dollar saved in year 1 is worth more than a dollar saved in year 15.
• It ignores everything after payback. A system that pays back in 9 years still earns for 16 more.
• It does not show financing costs if the buyer takes a loan.

For a quick comparison of two similar quotes, payback is enough. For a large decision, add NPV and IRR. You can also try the payback period calculator or read about payback period calculation.

Net present value (NPV)

NPV adds up the value the system creates, in today’s money.

NPV = -cost + sum of (net savings in year t / (1 + r)^t), for t = 1 to 25

Here r is the discount rate and t is the year. A positive NPV means the project earns more than your discount rate. A negative NPV means it earns less. NREL’s System Advisor Model training deck describes NPV as the present value of after-tax cash flows over the analysis period, and says a negative value may indicate a financially infeasible project (NREL SAM financial models webinar, 2023). The examples here ignore tax to keep the arithmetic short. Read more in the glossary entry on net present value.

Choosing the discount rate

Use the return you give up by putting money into solar.

• Cash buyer: the return on a safe alternative, such as a savings account or bonds.
• Loan buyer: at least the interest rate on the loan.
• Company: its own cost of capital.

The choice changes the answer a lot, so always show the rate in the proposal. Show NPV at two or three rates.

Results

Home cash flow at a 5% discount rate

The running total turns positive in year 12. That is the discounted payback: about 12 years at a 5% discount rate, against about 9 years for simple payback. The gap is the time value of money. The year 25 total, $16,543, is the NPV.

Internal rate of return (IRR)

IRR is the discount rate at which NPV is exactly zero. The NREL deck above gives the same definition. Think of it as the yearly return the project earns on the money you put in.

• IRR above your cost of money: the project creates value.
• IRR equal to your cost of money: the project breaks even.
• IRR below your cost of money: the project loses value.

You find IRR by trial, or with the IRR function in a spreadsheet. For our examples:

• Home: IRR 11.3%. A buyer with a 6% loan earns about 5 points above the loan cost.
• Business: IRR 17.7%. A company with an 8% cost of capital earns about 10 points above it.

For irregular cash flows, see XIRR in solar and our IRR calculation guide for the detailed method.

NPV or IRR?

Use IRR to compare projects or to speak with investors. Use NPV to show the gain from one project. Use both for finance teams.

What is a good payback or IRR for solar?

There is no one good number. It depends on the local power price, the system cost, incentives and your cost of money. A better test is simple: is the IRR above the interest rate on your loan, or above the return you could earn on a safe alternative? If yes, the project beats that choice.

We did not find a primary source that gives typical solar payback or IRR ranges for every market, so we do not quote ranges here. Our two examples use assumed inputs. They show the method, not what you will get.

How sensitive are the results?

Every result depends on assumptions. Change one input and see what moves. These tables use the same inputs as above. The home uses a 5% discount rate and the business uses 8%.

10 kW home

500 kW business

In both cases the power price path moves the answer as much as a 10% change in output. State your price assumption in every proposal.

P50 and P90

P50 is the yearly production the project is expected to beat half the time. P90 is the production it is expected to beat nine years in ten. P90 is the lower, more careful number. Lenders often ask for it. NREL’s SAM help defines a P90 value as one expected to be met or exceeded 90% of the time (SAM Help, 12 December 2024). See the glossary entry on P50 and P90.

Run the model at both. The 10% lower production rows above show what a drop in output does to each metric.

Show the right metric to the right person

The US Energy Information Administration describes LCOE as the estimated revenue required to build and operate a generator over a specified cost recovery period. Match the words to the person. A homeowner may glaze over at “IRR 11.3%” but understand “the system pays for itself in about 9 years.” For more, read solar proposal presentation tips and commercial solar monitoring ROI metrics.

Your numbers are only as good as your production estimate. A production figure that is 10% too high makes payback look shorter and IRR look higher, as the tables above show. Accurate solar design software gives you a better starting point.

Do it in a proposal

SurgePV includes financial modeling and proposals. Book a Free Demo to see how your project assumptions turn into a customer proposal. See the generation and financial tool and our guide to solar financial modeling software.

For the wider topic, see the financial modeling guide.

Frequently Asked Questions

What is a good payback period or IRR for solar?

There is no single good number. It depends on your local power price, the system cost, incentives and your own cost of money. A project is worth doing if its IRR is above the interest rate on your loan or the return you could earn elsewhere. In our example, an assumed 10 kW home system pays back in about 9 years with an IRR of 11.3%, and an assumed 500 kW business system pays back in about 6 years with an IRR of 17.7%. These come from assumed inputs, not market data.

How do you calculate payback period for solar panels?

Divide the net system cost by the net yearly savings. Net savings are the electricity you avoid buying plus any export income, minus yearly costs. For a $20,000 system that saves $2,000 a year, simple payback is 10 years. If power prices rise 3% a year and output falls 0.5% a year, payback in the same example is about 9 years.

What is NPV in solar energy projects?

Net present value (NPV) adds up all future cash flows from the project, each reduced to today’s value with a discount rate, and subtracts the cost. A positive NPV means the project earns more than your discount rate. In our assumed 10 kW example, NPV over 25 years is $16,543 at a 5% discount rate.

How does the discount rate affect solar project NPV?

A higher discount rate lowers NPV, because future savings count for less. In our assumed 10 kW example, 25-year NPV is $26,285 at 3%, $16,543 at 5% and $6,740 at 8%. Use the interest rate on your loan, or the return you could earn on a safe alternative. Companies use their own cost of capital. Always show the rate you used.

What is the difference between NPV and IRR?

NPV gives the value created in money terms at a discount rate you choose. IRR is the discount rate at which NPV is zero, shown as a yearly percentage. IRR is easier to compare across projects of different sizes. NPV shows the total gain from one project.

What financial metrics do solar investors look at?

Investors often look at IRR, NPV, payback and the levelized cost of energy (LCOE), which is the lifetime cost divided by the lifetime energy. Lenders also look at the debt service coverage ratio (DSCR), which is annual cash available for debt payments divided by the annual principal and interest payment. They usually want production estimates at P90, the level the project meets or beats 90% of the time, not only P50.