Calculating interest rate on purchase of Discounted contract.

[Time2]

I got into a discussion about how much a contract on a solar energy system contract is discounted when sold to a finance company.
I was told a $50k contract would sell for $30k, that is a 40% discount, I was skeptical, so did the basic math I know, which is limited. Assuming this is a 0% interest contract i.e. the interest is added up front.

If the interest is 0% on $50k for 25 years that is a $166.66 monthly payment or $2,000 a year. So if the finance company bought the $50k contract for $30k, their return on $30k is, $2,000 / $30,000 = 6.67%.
What I'm bothered by is, at the end of the contract you don't get the principal returned, and there is no amortization. The more I look, the less I like my calculation.


What is the proper way to calculate the return rate on the discounted contract purchase?

[pb4uski]

I don't think that is the way to do it.

Under each scenario the lender receives $166.67/month for 25 years, but in one case to get those payments they spend $50,000 and in the other case they spend $35,000$30,000.

=RATE(25*12,50000/(25*12),-50000)*12 = 0.00%
=RATE(25*12,50000/(25*12),-50000*(1-40%))*12 = 4.50%

or alternatively =((1+RATE(25*12,50000/(25*12),-50000*(1-40%)))^12)-1 = 4.59%

The $166.67 includes principal and interest in the case of the discounted loan, and only principal in the case of the 0% note. The total interest is $15,000$20,000.

[Time2]

Quote:

Originally Posted by pb4uski I don't think that is the way to do it. Under each scenario the lender receives $166.67/month for 25 years, but in one case to get those payments they spend $50,000 and in the other case they spend $35,000. =RATE(25*12,50000/(25*12),-50000)*12 = 0.00% =RATE(25*12,50000/(25*12),-50000*(1-40%))*12 = 4.50% or alternatively =((1+RATE(25*12,50000/(25*12),-50000*(1-40%)))^12)-1 = 4.59% The $166.67 includes principal and interest in the case of the discounted loan, and only principal in the case of the 0% note. The total interest is $15,000.

Thanks PB,

I think "in the other case" the number should be $30,000, but I see you used 40%, so it shouldn't matter..
Other than that, I don't know what 12,50000 means in =RATE( 25* 12,50000, and should it not be Rate = (25*12,5000/ etc?


At 4.5% it doesn't seem worth tying up $30k for 25 years.

[pb4uski]

Yes, you are right... $30k. I edited my prior post.

So you would be loaning out $30k and receiving monthly payments of $166.67 for 25 years? If so, given todays interest rates I don't see how that makes sense either.

[Time2]

Quote:

Originally Posted by pb4uski Yes, you are right... $30k. I edited my prior post. So you would be loaning out $30k and receiving monthly payments of $166.67 for 25 years? If so, given today's interest rates I don't see how that makes sense either.

Just to be clear, the discussion was, how much would a solar company need to discount a customers contract to a Finance Company? The number 40% was thrown out, at first I thought that's way to much. But since many of the loans are sold as 0% interest loans, the 40% now seems low. So a solar installation that would cost $30k has to be marked up to $50k to the purchaser in order for the solar company to sell it for $30k, and then still the return for the Finance Company is only 4.5%. :-(
After some more discussion I found the person paid $50,000 to have the installation done, but they said they had pool solar in that $50k price.
I was just trying to get some realistic numbers for a solar installation, with future value on the dollars paid. It got to complicated, when they took out a HELOC 4.5% and paid it off in 4 years at $622 a month, and then added in the 30% power company rebate going to the principal, (no time frame). I'm not even sure that it was a power company rebate, I thought it was a state or federal rebate.

I never have got a clear picture of anyone's cost or savings on the purchase of a solar energy system. I suspect many don't know how and others don't want to admit the high cost to them.

[perez99]

Quote:

Originally Posted by Time2 I never have got a clear picture of anyone's cost or savings on the purchase of a solar energy system. I suspect many don't know how and others don't want to admit the high cost to them.

I installed solar in January this year. I purchased the equipment and installation outright. From a financial point of view its just like any other capital investment for which I can compute the cash flows NPV to assess actual versus expected.
I have net metering with batteries for backup.

On a monthly basis, I have a spreadsheet where I input the amount of electricity consumed, the amount my utility would have charged me for it, and the actual amount paid by to the utility (customer service fee). Since I know my capital investment, I can use these cash flows to get an IRR/NPV.

I have an "expected" IRR assuming I will consume the average production of my system based on amount of solar energy in my area. Every month I tracked based on actual consumption.

[Time2]

Quote:

Originally Posted by perez99 I installed solar in January this year. I purchased the equipment and installation outright. From a financial point of view its just like any other capital investment for which I can compute the cash flows NPV to assess actual versus expected. On a monthly basis, I have a spreadsheet where I input the amount of electricity consumed, the amount my utility would have charged me for it, and the actual amount paid by to the utility (customer service fee). Since I know my capital investment, I can use these cash flows to get an IRR/NPV.

Having purchased the system out right, makes it the easiest case to analyze and I think any financing would cost more. So, at today's energy costs, what is the internal rate of return on your system?



I know it only gets better as time passes and rates go up.

Quote:

I have net metering with batteries for backup.

What price does the electric company pay you vs what you pay them?
I'm told on the local group they get less than $0.02 per kWh they sell back to the electric company. When our cost as best I can recall is $0.14 or $0.17 for anything over 1000kWhs.

Quote:

I have an "expected" IRR assuming I will consume the average production of my system based on amount of solar energy in my area. Every month I tracked based on actual consumption.

The return does depend on with the up front financing costs were negotiated out of the equation. I'm reading a local group and I'm afraid the person's story I'm most interested in, did not get a reduction in their cost. They did a HELOC to pay for a system that cost them $50,000. i.e. I think they paid full price including the mark up that would have went to the financial institution that bought the contract, if the buyer had not paid cash.
I would like to have solar, but I'm still not convinced they are cost effective. My neighbor has solar, but I can not get him to give me numbers, he doesn't want to talk about it, that makes me suspicious! We also have a hurricane problem in Fl. and already hard to get home insurance is made even more difficult because some ins. co, won't write on homes with solar collectors, or there is an additional cost for your home insurance. I keep reading local stories of people say they were scammed into solar and it is not working out the way the salesman told them.
Also, they expected to get the government incentive to buy solar and find that goes to the solar company, ya, I know, read the contract. Solar sales people are on a too constant canvasing of our neighborhood trying to sell systems, to the point where I read locals have put a sign on the door, No Solar Salesman.